INTEL ACCELERATES PENTIUM 4 PRODUCTION

January 19, 2001

COMMERCIAL NEWS

John G. Spooner reported for ZDNet News: As it prepares to announce fourth-quarter earnings Tuesday, Intel is putting the pedal to the metal with its Pentium 4 chip. Analysts said the Santa Clara, Calif.-based chipmaker will be shipping the Pentium 4 much more quickly than expected.

Pentium 4 shipments were a small piece of Intel’s (Nasdaq: INTC) overall chip sales in 2000, with Intel shipping only a few hundred thousand of the chips. But a Merrill Lynch report issued Thursday says Intel has divulged plans to increase Pentium 4 shipments to as many as 20 million chips this year.

Most analysts predicted Intel would ship about 15 million Pentium 4 chips in 2001. Mercury Research of Scottsdale, Ariz., predicted last quarter that Intel would ship about 14.4 million Pentium 4 chips in 2001.

The Merrill Lynch report, authored by analyst Joe Osha, stated: “Our most recent checks suggest that Intel is being very aggressive in positioning P4 in the marketplace…and our checks indicate that Intel is telling PC makers that it could deliver 18 million to 20 million P4 units during 2001. Our current model calls for 15 million P4 units in 2001.”

On the surface, the acceleration of Pentium 4 looks like a positive move, especially if it helps Intel boost its market share. But analysts say capturing significant market share could be a costly move.

“It is also possible, however, that Intel intends to take a substantial hit to gross margin in 2001 to establish P4 in the market even before the P4 becomes available on the more price-competitive (0.13-micron) manufacturing process,” Osha’s report continued.

The ability to increase production is caused by a number of complex factors, not all of which are positive.

The increase in Pentium 4 shipments is likely to be at least partly enabled by extra manufacturing capacity caused by the flagging PC market. Intel, along with the rest of the semiconductor industry, forecast high levels of demand in the second half of 2000. When that demand did not materialize, Intel was left with excess production capacity, said Mike Feibus, principal analyst at Mercury Research.

Move over to Pentium 4

Intel then decided to devote the extra capacity to its already bullish plan, driving the Pentium 4 into the mainstream PC market by producing more Pentium 4 chips, as opposed to producing additional Pentium III chips or idling factories.

“It makes more sense to be making Pentium 4’s than to be sitting idle in a very expensive factory,” Feibus said.

The Pentium 4, at 217 square millimeters, is roughly twice the size of the Pentium III chip, reducing the number of chips that can be made from a silicon wafer. Size has other liabilities, Feibus said.

“There’s what they call a defect density” in the silicon wafers used to manufacture the chips, he said. “The bigger you make the die, the more likely it’s going to get a defect. So you’ll get less than half the number of Pentium 4’s as you will Pentium IIIs.”

Meanwhile, with the PC market, the fight to push processor speeds higher also appears to be waning. The additional Pentium 4’s will come as changes in the competitive landscape conspire to slow the gigahertz race between Intel and rival Advanced Micro Devices.

Stroll to 2GHz

While Intel and AMD rushed to 1GHz in March of 2000, they seem to be taking their time getting to 2GHz.

Intel has stated publicly that it will offer a 2GHz Pentium III chip in the third quarter of this year. But sources say Intel originally told PC makers to expect the 2GHz chip in the second quarter. The company’s 1.7GHz Pentium III, which Intel told PC makers would come in the first quarter, is now planned for the second quarter, sources said.

Meanwhile, Sunnyvale, Calif.-based AMD throttled back on its aggressive introductions of Athlon chips, leaving Intel well ahead in the race. A 1.5GHz Athlon, based on statements by AMD CEO Jerry Sanders, was expected in the first quarter, but AMD revealed last November that the 1.5GHz had been pushed back to the second quarter of this year.

Instead of battling for speed bragging rights, Intel must concentrate on meeting all sections of the market with products such as the recently introduced 1.3GHz Pentium 4, Feibus said. “Intel really needs to focus on filling the gap between 1GHz and 1.5GHz,” Feibus said.

AMD sells most of its chips for PCs priced between $1,500 and $1,800, a section in the market that Intel did not have an offering for until the last week of December. Intel’s 1.4GHz Pentium 4 chip was intended for more expensive PCs and its 1GHz Pentium III for cheaper PCs.

The 1.3GHz Pentium 4 will help fill the gigahertz gap if Intel concentrates its extra capacity on shipping that chip, analysts said.

Most analysts expect that the market will begin to recover in the second half of this year, at which point Intel and AMD may pick up the pace again and resume their speed race. “As we go back to a more seasonal pattern (in 2001), things will look ugly until at least August,” Feibus said. Intel executives would not comment, citing the quiet period in advance of reporting earnings. But Executive Vice President Paul Otellini likely will give guidance about Intel’s Pentium 4 plans during the conference call after the earnings announcement.

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