Intel on building binge in Hillsboro, betting the company on ...

One after another after another, a parade of dump trucks files in and out of Hillsboro. Street sweepers scurry in behind them, scrubbing up the thick cake of dirt and dust left in their wake.

Intel has summoned thousands of construction workers to its Ronler Acres campus near Hillsboro Stadium, where they're doubling the size of a hulking, multibillion-dollar research factory called D1X, adding on even before the first phase is complete.

Semitrailers work in pairs to ferry mammoth concrete beams to Intel's Ronler Acres campus in Hillsboro, where a trio of towering construction cranes wait to hoist the beams skyward.

D1X

What it is: Chip research factory with 2.2 million square feet of manufacturing space in two identical phases, each one 120-feet tall.

Timing: The first phase began construction in 2010 and starts production this fall. Intel announced the second phase last October and hasn't said when it will be completed.

Cost: Intel said the first phase would cost $3 billion and budgeted $2 billion in 2013 to start the second phase.

Why: The buildings give Intel additional production capacity and prepare it for new manufacturing technologies, especially the transition to larger, more efficient 450-millimeter silicon wafers.

Even as it searches for a new CEO, the world's largest chipmaker is working feverishly to expand its production capacity in utter defiance of one of the technology's prevailing trends: Flat, or falling, personal computer sales.

Rather than hedging in the face of market uncertainty, Intel is betting the company on its manufacturing prowess. The frenzied work in Hillsboro is the physical manifestation of that gamble.

Intel has become too dependent on the PC, and has utterly failed to make inroads into the exploding market for mobile microprocessors. The iPhone, iPad and the array of devices that use Google's Android operating system all use custom microprocessors based on designs from ARM Holdings rather than Intel.

Stubbornly, Intel won't admit defeat; it's striving to improve its mobile chips and pressing its advantage in manufacturing.

If it succeeds, Intel could expand its market dominance for a new generation of computing, perhaps for decades into the future.

But it won't be easy, or cheap. The company's spending plans have driven off investors frightened by billions of dollars in expenses they hadn't foreseen, and invited ridicule from skeptics who doubt Intel can learn a new trick in mobile.

And if Intel fails it could be looking at a disaster, committing billions of dollars to factories that make chips nobody wants.

Yet industry observers and financial analysts say the company has no choice but to keep spending. Continued improvement in production technology is a necessary, if pricey, ingredient if Intel hopes to restore its market leadership.

"It's kind of a quandary right now for them. Their primary advantage, some would argue their only advantage now, is manufacturing," said Michael McConnell, an investment analyst who follows Intel for Pacific Crest Securities in Portland. "You spend right now for advantages three to four years down the road."

By the numbers, Intel remains quite robust. Its sales and profits last year were near records, and the company enjoys an enviable gross profit margin above 60 percent. Its stock price tells a different story. From a peak above $29 last May, Intel shares have shed nearly a third of their value. Last fall, mobile chip designer Qualcomm passed Intel as the most valuable semiconductor company in the world.

Intel enjoys its big profits because it's one of the few companies that can afford to invest the billions of dollars required to build cutting-edge, mass-production chip factories. It recoups those costs by outselling everybody else.

If sales stop growing, though, the dividends from its investments vanish, as do its profit margins.

"If you start emptying out the Intel fabs, their margins will evaporate in a hurry," said Scotten Jones, president of IC Knowledge in Massachusetts. "You've got to keep those fabs full."

Intel employs close to 17,000 in Oregon, more than any other business. The state is home to many top executives and its most advanced research and manufacturing, at the Ronler Acres campus.

It will only grow this fall when Intel opens the first, $3 billion phase of D1X. The company has said that it expects to add several hundred engineering and production jobs to staff the factory, known in the industry as a fab.

Intel announced plans for the second phase of the research factory last fall, and has committed $2 billion to it this year alone. The company hasn't said when it will open and declined to discuss how D1X 2.0 fits into its business.

But the new factory is at the heart of several technology transitions and strategic decisions Intel is juggling:

• New manufacturing technology: The second phase of D1X will be a "development factory" for computer chips made on 450-millimeter silicon wafers, due to replace the current 300 mm standard by the end of the decade. The new wafers, about the size of an extra-large pizza, can shave up to a third of the cost off chip manufacturing. But the transition requires expensive new factories, and billions of dollars' worth of new equipment.
• Mobile: Intel is racing to give its mobile processor, Atom, the same technological advances its PC chips have. It's also trying to integrate those mobile processors with wireless technologies, the way Qualcomm does.
• Contract work: Intel has begun contracting to make computer chips for other companies, using its own cutting-edge manufacturing technology. So far it's working with relatively small players in niche markets such as the arcane field of programmable logic. But analysts say Intel wants to position itself to make Apple's mobile chips. That could fill Intel's fabs for years to come, though profit margins in contract manufacturing are well below what Intel is accustomed to.
• A new CEO: On top of all this, Intel is seeking a replacement for Chief Executive Paul Otellini, who surprised the company's board and investors by announcing his retirement a month after Intel publicly committed to the second phase of D1X. That leaves his successor, whoever that might be, little latitude to change course when he or she takes over in May.

"The board is not going to give the nod to anybody who's not fully behind the strategy that they've laid out," said Stacy Rasgon, who follows Intel for Bernstein Research and is among the most outspoken about the challenges Intel faces during its transition.

If the board is committed, investors are not. Intel's share price ebbed even as the broader markets surged; Rasgon has an "underperform" rating on the stock.

That doesn't mean that Intel's making a mistake, he said. Rather, the company just doesn't have better options.

Imagine that Intel's mobile push is a success, and that a broad array of smartphone-makers adopt its processors. Mobile processors sell for a fifth the price of their PC equivalents, so Intel needs to capture a large share of the growing market to overcome flat PC sales.

"I've got to sell five of these," Rasgon said, "to make up for one PC."

Alternately, suppose that Intel wins the contract to make Apple's iPhone and iPad chips, but that Apple continues to use ARM's technology, rather than Intel's. Then Intel and its investors have to settle for sharply lower profit margins indefinitely.

Intel's manufacturing advantages are very real. Its technology is two to three years ahead of its rivals', meaning Intel chips are a good deal faster than the alternatives. Power consumption in Intel's mobile chips, long a liability, has become competitive, and figures to become more so in the coming years.

With the second phase of D1X, Intel is positioning itself to be the first chipmaker to deploy 450 mm technology, and the first to capitalize on the associated cost savings.

So it's possible to envision a scenario several years hence when quality ultimately wins out, where Intel establishes itself in the mobile chip market and captures enough of it to compensate for flat sales of PCs and laptops.

That's Intel's dream scenario, and Rasgon doesn't discount it. But all the digging and building under way in Hillsboro serves as a visceral reminder of just how expensive and painful the transition will be -- especially for investors, who count every penny going in the ground in Oregon as one less in their pocket.

"Our take is what they're doing is absolutely the right thing for the company. I don't think it's the right thing for the stock," Rasgon said. "But you don't run a company to please Wall Street. Or you shouldn't."

Source: http://www.oregonlive.com/silicon-forest/index.ssf/2013/03/intel_on_building_binge_in_hil.html

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