Chip giant Intel continues its strategy of innovating during a downturn, with a $7 billion investment in upgrading factories in the U.S.
It's not every day you get a call from the President. But with so few manufacturing companies announcing they would be expanding in the U.S. during the economic downturn, it's no wonder Intel (INTC) Chief Executive Officer Paul S. Otellini had a quick chat with President Barack Obama back in February as the Administration sought supporters for its giant federal stimulus bill. President Obama called to congratulate him on the expansion decision and asked Otellini to support the bill.
Intel was readying a stimulus plan of its own. Otellini announced that the Santa Clara (Calif.) chipmaker would spend $7 billion through 2010 to upgrade three U.S. manufacturing plants. The move prompted some serious internal debate about the wisdom of spending so much money during a prolonged downturn where few are willing to predict a sustained return to growth.
European antitrust regulators recently slapped Intel with a $1.45 billion fine by after accusing the company of manipulating the market by paying customers not to design products using chips from rival Advanced Micro Devices (AMD). But Otellini insists that Intel did nothing wrong. He says Intel's technology and market heft benefits consumers by allowing Intel to make chips more cheaply with each passing year.
Though innovating during a downturn once had many skeptics, tech outfits such as Apple (AAPL), Cisco Systems (CSCO), and others now are following Intel's strategy. Rivals who do not have the money or manpower to catch up when the economy eventually recovers rapidly lose market share as pent-up demand leads businesses and consumers to snap up newer technology. Intel uses its manufacturing prowess to make faster, more energy-efficient chips. It also benefits because by using the latest chipmaking technology, it can make products at lower costs.
During the last big drop in tech spending, Intel created a strategy called "tick-tock," in which it followed every upgrade to its factories with a new chip design. AMD has been unable to keep up. It recently spun off its manufacturing arm to focus on improving designs more quickly. Intel's worldwide share of the computer chip market in 2008 rose to nearly 82%.
Now the company is branching out with a new family of chips called Atom that will be used in everything from low-cost PCs called netbooks to consumer electronics and high-end cell phones. The chips and other technology packaged with them could deliver power-saving features and lower manufacturing costs for customers in the cutthroat industries. If Intel succeeds, it would add several billion dollars to its coffers over the next three years. "They've reinvented themselves with the new chips they designed, but they also reinvented their business," says UBS chip analyst Uche Orji.