Intel: A Huge Chunk Of Revenue At Risk
Contributor since 2019 / 1782 Followers
Summary:
- Shenzhen, once a fishing village, has transformed into a global tech hub and a symbol of China’s economic miracle.
- China now produces seven times more engineers than the USA, posing a threat to Intel Corporation’s dominance in the industry.
- China’s push for domestic chip production and export restrictions on American technology could lead to revenue losses for Intel.
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Preamble
In the 1970s, Shenzhen was a sleepy fishing village a stone’s throw from Hong Kong. The key skills necessary for the village’s inhabitants were making nets and repairing leaky wooden boats. I’m pretty sure that only the wealthiest members of the village even had two pairs of pants. For those in the West, we were all watching re-runs of “Happy Days.” Fast forward only 50 years, and Shenzhen accounts for 90% of the world’s manufactured electronic products.
Nowadays, the city has more than solidified its position as a global tech hub. It boasts world-class universities, research parks, and venture capital firms. Shenzhen stands as a symbol of China’s economic miracle, a testament to its ability to transform itself in just a few decades.
In order to continue its march forward, China graduates significantly more engineers than the USA. In 2020, China awarded roughly 1.38 million engineering bachelor’s degrees, whereas the comparable number for the USA for the same year was around 197,000. In other words, China produces roughly seven times more engineers than the USA.
Given the speed with which China is developing its electronics and chip technology and that something in the order of 26% of Intel Corporation (NASDAQ:INTC) revenue comes from China, it is fair to speculate that Intel is in danger of losing a significant dollop of its revenues.
Intel’s Recent Challenges
Followers of Intel will already be familiar with the many headwinds the company has faced in recent years. There has been the competition from Advanced Micro Devices (AMD), which, after years of trailing behind Intel, AMD has made major gains with its Zen architecture CPUs, providing stiff competition to Intel’s offerings in terms of performance and power efficiency, especially in the server and high-end desktop markets.
There have been the well-publicized manufacturing delays, which caused the company to struggle with setbacks in transitioning to newer, more advanced manufacturing nodes like 10nm and 7nm. This has allowed competitors like AMD, which outsources manufacturing to TSMC (TSM), to gain an edge with smaller, more efficient chip designs.
Major security flaws such as Spectre and Meltdown have dented Intel’s reputation and required significant efforts to mitigate against these issues.
Worst of all, there have been declines in revenues, as disclosed in the most recent report:
“Fourth-quarter revenue was $15.4 billion, up 10 percent year-over-year (YoY). Full-year revenue was $54.2 billion, down 14 percent YoY.”
It is my contention that these declines have the potential to accelerate in the years and months ahead.
Recent History
It is clearly evident that the U.S. government views competition with China as a defining challenge of the 21st century. This competition extends to technological dominance, with the U.S. implementing strict export controls to curb China’s access to advanced semiconductors and the equipment necessary to make them. This strategy is already having an impact, on companies such as ASML Holding N.V. (ASML) complying with the U.S. restrictions. Indeed, recent data shows that ASML also gets a big lump of revenue from China.
Furthermore, the U.S. is pressuring South Korea to restrict exports of advanced chipmaking technology to China, mirroring U.S. restrictions. This aims to slow China’s chip industry growth due to national security concerns. The restrictions target cutting-edge logic chips and DRAM memory. However, South Korea is hesitant due to its reliance on China as a trading partner, particularly for tech giants like Samsung and Hynix.
The U.S. is also growing increasingly concerned about China’s dominance in legacy chips, which power everyday electronics like washing machines, cars, TVs, and medical devices. While not as advanced as cutting-edge chips used in AI, legacy chips are crucial for consumer and industrial applications.
China’s Reaction
In October 2023, it was reported that China’s SMIC had begun manufacturing the Kirin 9000S, which is a 7nm mobile system-on-a-chip (SoC). It would appear that the chip is approximately the same level as a Qualcomm Snapdragon 865.
Only 5 months later, news is filtering out about SMIC producing 5 nm chips designed by technology giant Huawei. The reports say that the country’s biggest chipmaker, SMIC, has put together new semiconductor production lines in Shanghai to mass-produce the chips.
Despite U.S. restrictions, China is pushing forward with 5nm chip production for Huawei smartphones, CPUs, GPUs and AI processors. This isn’t the most advanced technology, for instance, the chips in Apple’s latest high-end iPhones are made on TSMC’s 3nm process. However, SMIC’s 5nm process narrows the gap with competitors and shows progress in China’s domestic chip industry. Success could lead to further advancements, potentially reducing reliance on foreign manufacturers such as Intel.
Given the new U.S. restrictions, China is encouraging homegrown companies that compete directly with companies such as Intel, which spells bad news for Intel investors.
Current Situation
China’s government is flexing its technological muscle, banning Intel processors from all government computers and servers. This move, is a calculated blow aimed at reducing dependence on American technology and boosting China’s domestic chip industry. While the immediate financial impact on Intel is not known, it signifies an unpleasant trend for Intel investors. As previously noted, let us not forget that around 26% of Intel’s revenues comes from China.
The real beneficiaries of this ban are China’s domestic chipmakers. One such company is Hygon, a prominent player in the domestic market, and is projected to experience double-digit revenue growth and increased market share thanks to the surge in government demand. Similarly, Huawei’s Kunpeng processors are seen as a strong alternative for government servers. Zhaoxin, another domestic player, stands to gain traction with its new chiplet-based KX-7000 architecture, which could receive a significant boost from government support. A quick trip to the websites of these companies reveals that they produce products that can compete with those of Intel.
If you check out Huawei and its chip design arm HiSilicon, you may note that the company has made significant strides in developing high-performance chips for smartphones, servers, and networking equipment, posing a threat to Intel’s offerings in these markets.
If the idea of losing a substantial portion of revenue from China is not enough to make Intel investors nervous, how about the idea that China commences exporting products containing alternatives to Intel to BRICS nations and members of the Shanghai Cooperation Organization?
China’s Emerging Trade Links
The Shanghai Cooperation Organization (SCO) has become a pivotal platform for implementing China’s Belt and Road Initiative (BRI) across Eurasia and beyond. The BRI, China’s ambitious infrastructure investment program, aligns closely with the SCO’s goal of enhancing regional economic integration. Many proposed BRI transport corridors and trade routes traverse SCO nations such as Russia, Kazakhstan and Pakistan.
Overall, the BRI serves China’s objectives of exporting industrial overcapacity, securing markets for its firms, and deepening economic interdependence with partners. Data indicates:
“Trade among SCO members had risen to US$6 trillion in 2020 from US$667 billion when the group was founded in 2001.”
So, one may assume that once China gets started and ramps up production of Intel-like chips, members of the SCO will begin buying copious quantities of PCs, Servers and so on built around these chips.
Intel has already lost one enormous customer with a population of some 144 million souls. On 5th April 2022, Intel announced; “we have suspended all business operations in Russia.” I think we can all agree that Russia is not a third world country, nor did it have a minuscule potential market for Intel products. This market will obviously be satisfied by Chinese chipmakers. How many more customers will be lost once China jacks up their manufacturing?
Caution
It is possible that the company’s plans surrounding Client Computing Group, Data Center, AI, Foundry and so on will prove a huge success, thus countering any revenue losses that may or may not occur as a result of China’s activities.
In the last quarterly report, there were some encouraging signs. Intel Foundry Services were up 103% and Mobileye was also up. Also noteworthy was; “Fourth-quarter revenue was $15.4 billion, up 10 percent year-over-year (YoY).”
Summary
China’s technological advancements and the U.S. government’s export restrictions threaten a significant portion of Intel’s revenue, particularly the 26% generated from China.
However, Intel’s Foundry Services and Mobileye show promise, and the company’s overall revenue did increase in the last quarter.
Overall, Intel faces a challenging environment in the Chinese market and needs to adapt to secure its future.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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