WHY IT PAYS TO STAY AHEAD OF THE INNOVATION CURVE – INTEL

Intel has proven to itself – and anyone who wants to watch and learn – that staying ahead on innovations of current products is an absolutely necessity.

Otherwise, the game of catch-up can be very expensive, particularly if the catch-up activities are ineffective.  Intel announced plans last week to exit the business of making modem chips for smartphones.  The company has said that it will fulfill its contracts for current generations of those processors but will halt plans to build chips based on the incoming 5G wireless standard (ref. WSJ).  As a result of the decision, share prices rose.  Intel missed the early, lucrative days of the smartphone revolution, then tried to make up lost ground by challenging Qualcomm in modems with the help of its substantial chip making prowess.  That process was aided by the quarrel between Qualcomm and Apple, which led the iPhone maker to award the contracts for its smartphone to Intel.  The iPhone 7 that was launched in 2016 was the first to use Intel’s modem chips in some of its versions.  The current iPhone XS is the first to completely rely on Intel chips.  However, too little, too late – the iPhone business has declined.  And, while Apple still ships more than 200 million phones a year, growth has halted as the iPhone business has matured.  (See recent post of Apple’s work to plan a different future that doesn’t rely so heavily on the iPhone.)  The costs to Intel of keeping its modem competitive for a demanding customer like Apple were substantial and having to produce the chip put additional strain on Intel’s already tight production schedule.   While at the same time, Intel’s modem production business and other related “adjacencies” generated only 5% of the company’s revenue last year.  It is estimated by analysts that Intel has lost about $20 billion, all told, in the effort to provide mobile chips.  Had the company been in the smartphone chip making business from the beginning, where large profits were easier to come by, the loss would be just an understandable winding-down of a maturing business.  This is all part of Intel’s losing ground for several years during which time the former CEO forgot to continue the effort of being competitive and, instead, focused on unrelated matters.  In previous posts, we discussed the new CEO Bob Swan and his talent in leading the company.  The decision to jettison the smartphone chip making process is seen as a smart move by Swan – one of many of his recent decisions that fall into the category of “wise and timely.”  This seems particularly appropriate in light of the fact that Apple is currently working on its own modem chip for future iPhone models.  Remember the slogan “Intel inside” – ?  Intel once had the goal of getting its chips inside every technological device.  But, once the ball has been dropped – such as with the smartphones – it’s best to back off and start a new process of being selective about production so that the company can, once again, excel at being Intel.

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