How Intel Financialized and Lost Leadership in Semiconductor Fabrication

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Yves here. Get a cup of coffee. This is an extremely well documented account of how Intel chose pumping up its stock over defending a core business.

By William Lazonick, Professor of Economics, University of Massachusetts Lowell,
President, The Academic-Industry Research Network, and Matt Hopkins, Senior Researcher, The Academic-Industry Research Network. Originally published at the Institute for New Economic Thinking website

Innovation and Competition in Global Semiconductor Fabrication

For a half-century after the invention of the integrated circuit at Texas Instruments (TI) and Fairchild Semiconductor in the late 1950s, the United States was a leader in global semiconductor fabrication. Until 1991, TI and Motorola were the world’s leading integrated device manufacturers (IDMs), selling chips they fabricated, at which point they were surpassed by Intel, with its microprocessor having become the standard hardware in personal computers.[1]

Meanwhile, from the early 1980s, “fabless” semiconductor companies – firms that designed, but did not fabricate chips themselves – proliferated, creating products for varied segments of the memory and logic markets. Initially, these design companies turned to IDMs for wafer fabrication. Responding to the opportunity to manufacture chips for fabless firms, in 1987 Morris Chang, a Taiwanese native with electrical engineering degrees from MIT and Stanford and 25 years of work experience at TI, launched Taiwan Semiconductor Manufacturing Corporation (TSMC) as the world’s first “pure play” foundry. In 1985, the Taiwanese government had lured Chang back home to head its Industrial Technology Research Institute (ITRI), from which TSMC was spun off with financial backing from a state development fund and the Dutch electronics company Philips.

In 1980, ITRI had created United Microelectronics Corporation (UMC) as Taiwan’s first IDM. In 1995 UMC divested its chip-design business as MediaTek and became a pure-play foundry.[2]In 2020, TSMC’s revenues were $46.9b., 7.4 times UMC’s. Close in sales to UMC was GlobalFoundries (GF), a 2009 spin-off from U.S.-based Advanced Micro Devices (AMD). GF subsequently acquired fabs of Chartered Semiconductor (Singapore) and IBM. Now wholly owned by an Abu Dhabi sovereign wealth fund, GF’s global headquarters are in New York State. In fourth place among the dedicated foundries is China-based Semiconductor Manufacturing International Corporation (SMIC), with 2020 revenues of $3.8b.[3]

Larger, however, than UMC, GF, and SMIC as a semiconductor fabricator is Samsung Electronics Corporation (SEC), the flagship company of the Korean Samsung chaebol, with estimated 2020 foundry revenues of $14.7b., more than twice those of UMC and GF. In 2020, SEC generated $200.6b. in total revenues across all product segments, of which semiconductors contributed $121.0b. Besides the $14.7b. in foundry revenues, SEC’s fab output consisted of $59.3b. in chips used in SEC products such as smartphones and computers as well as $47.0b. in SEC-designed chips sold externally. As an IDM, SEC was second globally to Intel, which had $77.9b. in 2020 semiconductor revenues. Among the fabless firms competing with Intel at the high end of the processor market are U.S.-based Nvidia (2020 revenues: $16.7b.) and AMD ($9.8b.).

The most advanced chips are produced for smartphones as “system-on-a-chip” (SOC). The leading designers of SOCs are Apple (USA), Qualcomm (USA), SEC (South Korea), and MediaTek (Taiwan). HiSilicon, a wholly-owned subsidiary of Huawei Technologies (China), was also a SOC leader until U.S. trade sanctions, implemented from August 2020, terminated its access to TSMC’s fab output.[4] TSMC and SEC use 7nm and 5nm process technology to manufacture many of these mobile processors along with the most advanced AMD computer and Nvidia gaming SOCs. According to TSMC, compared with 7nm, 5nm offers 15% faster speed, 30% less power consumption, and 1.8 times the logic density.[5]

TSMC’s most important advanced-fabrication customer is Apple, accounting for 22% of net revenues in 2018, 23% in 2019, and 25% in 2020.[6] From the iPhone’s launch in 2007, Apple relied on SEC for chip fabrication, for which the Korean company built a state-of-the-art plant in Texas. But SEC subsequently emerged as Apple’s leading competitor in smartphones. In early 2011, Apple filed a smartphone-patent infringement suit against SEC. As an alternative to SEC, Apple contracted with TSMC for foundry services but needed more than five years to shift iPhone chip fabrication entirely from SEC to TSMC.

With its Apple contract, TSMC now leads the race in advanced process technology, with SEC close behind. In 2020, both TSMC and SEC transitioned from 7nm to 5nm process, and in 2021 both are making investments to commercialize 3nm. TSMC went from zero 5nm revenues in 2Q20 to 8% in Q320 and 20% in Q420.[7]SEC is intent on closing the technology gap with TSMC by allocating $28b. to capital expenditures in 2021, about the level of its 2020 plant and equipment (P&E) investments.

For its part, TSMC has announced plans to spend $100b. in total on P&E and R&D over the next three years, including $30b. in 2021, up from $17.2b. in 2020. TSMC will construct a $12b. 5nm facility in Arizona and is also considering the state as the site for a $25b. 3nm fab.[8] Most of this new capacity is slated to fabricate Apple’s M-series processors.[9]

Intel still leads the global semiconductor industry in total revenues. But, as an IDM, Intel manufactures almost all its CPUs at 14nm, and its 10nm capacity has been stuck, with limited output, since 2018.[10] Meanwhile, Apple is abandoning Intel processors for its Mac computers, turning instead to TSMC to fabricate Apple’s own designs.[11] Intel itself already contracts with TSMC and UMC to produce 15-20% of its non-CPU chips. Moreover, later this year, TSMC will commence production of intel’s Core i3 processors, inside advanced laptops, at 5nm.[12]

Even as it has fallen behind in advanced chip fabrication, Intel has remained a very profitable company, averaging $21.0b. in annual net income in 2018-2020, with average annual P&E expenditures of $15.2b. In 2021, Intel expects to produce its first 7nm CPU, while increasing P&E spending to $20b.

As part of its IDM 2.0 strategy for manufacturing, innovation, and product leadership, announced in March by the company’s new CEO, Pat Gelsinger, Intel plans to build two fabs in Arizona.[13 ]Included in IDM 2.0 is the launch of Intel Foundry Services “with plans to become a major provider of foundry capacity in the U.S. and Europe to serve customers globally.”[14] Yet even if Intel should achieve 7nm on a significant scale in 2021, it will fall further behind TSMC and SEC as this decade unfolds. At some point, Intel could even find itself trailing SMIC, especially if China responds to U.S. trade restrictions by developing a semiconductor equipment supply chain that is not dependent on U.S. vendors.[15]

Intel’s External and Internal Competitors

Why has Intel fallen behind TSMC and SEC in semiconductor fabrication, and why is it unlikely to catch up? The problem is that Intel is engaged in two types of competition, one with companies like TSMC and SEC in cutting-edge fabrication technology and the other within Intel itself between innovation and financialization. The Asian companies have governance structures that vaccinate them from an economic virus known as “maximizing shareholder value” (MSV).[16] Intel caught the virus over two decades ago. As we shall see, with the sudden appointment of Gelsinger as CEO this past winter, Intel sent out a weak signal that it recognizes that it has the disease.

In the years 2011-2015, Intel was in the running, along with TSMC and SEC, to be the fabricator of the iPhone, iPad, and iPod chips that Apple designed. While Intel spent $50b. on P&E and $53b. on R&D over those five years, it also lavished shareholders with $36b. in stock buybacks and $22b. in cash dividends, which together absorbed 102% of Intel’s net income (see Table 1). From 2016 through 2020, Intel spent $67b. on P&E and $66b. on R&D, but also distributed almost $27b. as dividends and another $45b. as buybacks. Intel’s ample dividends have provided an income yield to shareholders for, as the name says, holding Intel shares. In contrast, the funds spent on buybacks have rewarded sharesellers, including senior Intel executives with their stock-based pay, for executing well-timed sales of their Intel shares to realize gains from buyback-manipulated stock prices.

Table 1: Intel: stock buybacks (BB), cash dividends (DV), plant and equipment expenditures (P&E), and research and development expenditures (R&D), with ratios to net income (NI) and revenues (REV), 1991-2020 Source: Intel 10-K filings.

As Table 2 shows, Intel’s distributions to shareholders have been far greater than those made by either SEC or TSMC.

Table 2: Stock buybacks (BB) and cash dividends (DV) as percentages of net income (NI) at Intel, SEC, and TSMC, 2001-2020 Sources: Intel, Form 10-K filings; TSMC and SEC, Form 20-F filings.

The purpose of SEC’s stock buybacks in 2002-2007 and 2014-2018 was to increase the voting power of the founding Lee family, thereby consolidating its strategic control over resource allocation against the threat of corporate raiders.[17] It is clear from SEC’s remarkable history that the Lee family has used its strategic control to allocate profits to investments in world-class productive capabilities. So too at TSMC under the leadership of Morris Chang. At 50% of net income over the past decade, TSMC’s dividend payout ratio was 2.8 times that of SEC and 1.4 times that of Intel. The sole purpose of TSMC’s stock repurchases between 2003 and 2008 was to buy out the ownership stake of Philips.[18]

Innovation requires a social condition we call financial commitment to sustain technological transformation and market access until the generation of a higher-quality, lower-cost product can result in financial returns.[19] The foundation of financial commitment is retained earnings. In the case of Intel, as shown in Table 1 above, in recent years the company has made substantial allocations to P&E and R&D, even as it has distributed almost all its profits to shareholders.[20] But Intel has been able to tap other cash flows to make, simultaneously, large-scale productive investments and shareholder payouts. For the decade, 2011-2020, these other cash flows included depreciation charges of $87b., long-term debt issues of $45b., and stock sales (mainly to employees in stock-based compensation plans) of $12b.

Given the availability of these sources of funds, the vast sums that Intel has wasted on buybacks have not thus far imposed a cash constraint on its investments in semiconductor fabrication. Rather, it has been a deficiency in organizational learning—the essence of the innovation process—that has hampered Intel’s implementation of process technology. The generation of high levels of productivity from P&E and R&D expenditures requires, as a second social condition of innovative enterprise, organizational integration, working in combination with financial commitment. Organizational integration mobilizes the skills and efforts of large numbers of people in a hierarchical and functional division of labor into the collective and cumulative learning processes required to transform technologies to generate a higher-quality product and, then, access markets to attain economies of scale.

The root of Intel’s failure in organizational integration lies in the financialized character of a third social condition of innovative enterprise, strategic control. Accepting stock yield as the measure of enterprise performance, in recent years Intel’s senior executives who exercise strategic control have lacked both the incentive and, increasingly we would argue, the ability, to implement innovative investment strategies through organizational integration.

Executive stock-based pay, in the form of stock options and stock awards, has created incentives for Intel’s CEOs to do large-scale buybacks to give manipulative boosts to the company’s stock price. Table 3 documents the total compensation, including realized gains from stock options and stock awards, of Intel’s CEOs over the past three decades.

Of the $170m. in total compensation that Grove took home over six years as CEO, 90% was realized gains from stock-based pay, with 89% of the $170m. flowing into his bank account in 1996 and 1997 as the Internet stock-market boom took off. Aided by the boom and a doubling of Intel’s buybacks to $6.8b. in 1998, Barrett’s total compensation in his first year as CEO was $117m., with 98% of it realized gains from exercising stock options.

Table 3: Total and stock-based remuneration of Intel CEOs, 1992-2020 Source: Intel DEF 14A proxy filings. Note: Stock-based pay is measured as the actual realized gains from the exercise of stock options and vesting of stock awards.

Intel’s buybacks reached $10.6b. in 2005, the year in which Otellini, Intel’s first non-engineer CEO, took over. Buybacks declined to an average of $1.7b. in 2008 and 2009 in reaction to the financial crisis, but then were jacked up to as high as $14.3b. in 2011. The following year, buybacks were $5.1b. as Otellini departed as CEO with $40m. in total compensation, 82% of it stock-based.

With Krzanich as CEO, buybacks peaked at $10.8b. in 2014. He raked in $40 million in total pay (79% stock-based) in 2017 but was ousted in mid-2018 for having a “consensual relationship” with an Intel employee.[21] In early 2018, news outlets alleged that Krzanich engaged in insider trading, based on non-public information of security flaws in Intel’s CPUs, as he sold all his Intel shares except for the minimum 250,000 he was required by contract to hold.[22]

With Krzanich’s exit, the new CEO was Robert Swan, an MBA who had spent his career in finance at a number of companies, including GE, TRW, Northrup Grumman, eBay, and General Atlantic, before joining Intel as CFO in 2016. From 2018 through 2020, Swan averaged just under $13m. in total remuneration, of which 57% was stock-based. In the Swan years, annual dividends were 19% higher and annual buybacks 186% higher than in the Krzanich years.

The pressure on a U.S. publicly listed company such as Intel to do buybacks comes not only from senior executives as “value-extracting insiders” but also from the threat of attack by hedge-fund activists as “value-extracting outsiders.”[23] The activists purchase a small fraction of a company’s shares on the stock market and then, to encourage the insiders to do buybacks, line up the proxy votes of asset managers, who function as “value-extracting enablers.” The U.S Securities and Exchange Commission provides “regulatory” support for this predatory value extraction with its Rule 10b-18, which since its adoption in 1982 has given a company that does massive buybacks a “safe harbor” from stock-price manipulation charges.[24]

Will Intel’s New CEO Turn the Company from Financialization to Innovation?

Those who exercise strategic control at Intel need to ask themselves why, in doing buybacks, they are showering cash on public shareholders who are merely stock traders looking for the most lucrative opportunity to rid themselves of the company’s shares. Part of the problem, as we have seen, is that those who exercise strategic control at Intel have been increasingly incentivized to focus on precisely this type of value-extracting behavior.

On January 13, 2021, Intel suddenly announced that Swan’s stint as CEO would end on February 15, with industry veteran Pat Gelsinger taking over. Gelsinger had joined Intel in 1979 at the age of 18, subsequently earning a bachelor’s degree from Santa Clara University and a master’s from Stanford, both in electrical engineering. He was central to the design of Intel’s microprocessors in the last half of the 1980s, when the company was rising to dominance in the field. He became Intel’s first chief technology officer in 2001 and senior vice president of the company’s Digital Enterprise Group in 2005. From 2009 to 2012, Gelsinger was president and chief operating officer of EMC, the leading computer storage company, and then became CEO of VMware, a publicly listed company controlled by EMC and then, from 2016, by Dell Technologies after the merger of Dell and EMC.

Is Gelsinger a CEO who understands that Intel cannot hope to regain global technological leadership in semiconductor fabrication unless it stops doing buybacks to manipulate its stock price so that it can be wholly focused on investing in innovation? In an interview broadcast by CBS’s Sixty Minutes on May 2, Gelsinger complained that the U.S. share of world semiconductor manufacturing had declined from 37% to 12% in the past 25 years and told interviewer Lesley Stahl that “Intel has been lobbying the U.S. government to help revive chip manufacturing at home—with incentives, subsidies, and-or tax breaks, the way the governments of Taiwan, Singapore, and Israel have done. The White House is responding, proposing $50 billion for the semiconductor industry in the U.S. as part of President Biden’s infrastructure plan.”

Stahl asked Gelsinger why, given its profitability, Intel needed U.S. government support, to which the CEO invoked U.S. national interest: “This is a big, critical industry and we want more of it on American soil: the jobs that we want in America, the control of our long term technology future, and as we’ve also said, the disruptions in the supply chain.”

Stahl countered: “You have spent much more in stock buybacks than you have in research and development. A lot more” (for the record, in 2019-2020, Intel spent $27.8b. on buybacks and $26.9b. on R&D). Gelsinger replied: “We will not be anywhere near as focused on buybacks going forward as we have in the past. And that’s been reviewed as part of my coming into the company, agreed upon with the board of directors.”

Gelsinger’s response is a rare instance of a sitting CEO of a major U.S.-based company even implying that buybacks may have undermined its ability to compete in its industry. As for his deal with the board that “we will not be anywhere near as focused on buybacks going forward,” Intel’s financial report for Q121 shows that between February 22 and March 27, with Gelsinger at the top, Intel executed $1.5b. in buybacks. Perhaps the new CEO was focused on other things during his first month and a half in office. For Intel as for other major U.S. corporations, the addiction to buybacks is hard to kick.

The 19 publicly listed corporate members of the U.S. Semiconductor Industry Association that signed a letter to President Biden in February,[25] asking the government for financial support for their industry, did buybacks of $540b. (2020 dollars) from 2001 through 2020, with IBM, Intel, Qualcomm, and TI accounting for 84% of these repurchases. In 2016-2020 alone, these 19 companies squandered $148b. (nominal) on buybacks—almost three times the $50b. in financial aid that the Biden administration has offered the SIA.

Our policy recommendation for the Biden administration is simple: As a condition for giving the U.S. semiconductor industry $50 billion in infrastructure assistance, put a ban on SIA members doing stock buybacks as open-market repurchases. That legislation can then be a first step in Congress rescinding the Securities and Exchange Commission’s Rule 10b-18—corporate America’s license to loot.[26] With a critically important company like Intel focused on innovation rather than financialization, the United States can get back to the business of building a world-class semiconductor-fabrication industry – one that leads rather than lags advances in technology.

Acknowledgments

This article draws on a public comment submitted by the authors on April 5, 2021, to Industry and Security Bureau, Office of Technology Evaluation, U.S. Department of Commerce, Risks in the Semiconductor Manufacturing and Advanced Packaging Supply Chain, BIS-2021-0011. It also summarizes part of a study of why the United States has fallen behind in semiconductor fabrication, and what it needs to do to catch up, funded by the Institute for New Economic Thinking (INET). We thank Thomas Ferguson, Ken Jacobson, Yin Li, and Jang-Sup Shin for their comments on a previous draft.

Endnotes

[1] William Lazonick, Sustainable Prosperity in the New Economy? Business Organization and High-tech Employment in the United States, W. E. Upjohn Institute for Employment Research, 2009, ch. 2.

[2] John A. Mathews and Dong-Sung Cho, Tiger Technology: The Creation of a Semiconductor Industry in East Asia, Cambridge University Press, 2000.

[3] Thomas Alsop, “Leading semiconductor foundry revenues worldwide 2019-2021, by quarter,” Statista, March 8, 2021.

[4] For a recent rating of the 30 leading SOCs, see Kashish Kumawat, “Best mobile processor ranking list 2021,” Tech Centurion, March 29, 2021. Of the 30 processors in the list, Qualcomm claimed nine spots, HiSilicon seven, and MediaTek six, Samsung five, and Apple three.

[5] Anton Shilov, “The future of leading-edge chips according to TSMC: 5nm, 4nm, 3nm and beyond,” techradar, August 31, 2021.

[6] TSMC, Form 20-F filing with the United States Securities and Exchange Commission, 2020, p.8; “TSMC’s largest customer makes up 25% of revenue, Taipei Times, March 9, 2021; Codrut Nistor, “Apple secures 80 percent of TSMC’s 5 nm production capacity for the coming year,” Notebookcheck, December 21, 2020.

[7] See TSMC, Management Reports for Q320, Q420, and Q121.

[8] Anton Shilov, “TSMC plans to spend $100B on fabs and R&D over the next three years: 2nm, Arizona fab & more,” AnandTech, April 2, 2021.

[9] “Apple unleashes M1,” Apple Press Release, November 10, 2020.

[10] A. Souppouris, “A strong Intel is what the tech industry needs right now,” Engadget, March 24, 2021.

[11] Kif Leswing, “Apple is breaking a 15-year partnership with Intel on its Macs—here’s why,” CNBC, November 10, 2020.

[12] Luke James, “Intel set to outsource select CPU production to TSMC’s 5nm process,” AllAboutCircuits, January 20, 2021.

[13] “Intel CEO Pat Gelsinger announces ‘IDM 2.0’ strategy for manufacturing, innovation and product leadership, Intel Press Release, March 23, 2021.

[14] Ibid.

[15] Arjun Kharpal, “How Asia came to dominate chipmaking and what the U.S. wants to do about it,” CNBC, April 11, 2021.

[16] William Lazonick, “Maximizing Shareholder Value as an Ideology of Predatory Value Extraction,” in Knut Sogner and Andrea Colli, eds., The Emergence of Corporate Governance: People, Power, and Performance, Routledge, 2021: 170-186.

[17] Samsung, Form 20-F filings; Jonathan Cheng and Min-Jeong Lee, “Samsung to buy back $2 billion worth of shares,” Wall Street Journal, November 26, 2014.

[18] TSMC, Form 20-F filings; “Philips to sell its 16.2% stake in Taiwan’s TSMC,” New York Times, March 9, 2007.

[19] William Lazonick, “The Theory of Innovative Enterprise: Foundations of Economic Analysis,” in Thomas Clarke, Justin O’Brien, and Charles R. T. O’Kelley, eds., The Oxford Handbook of the Corporation, Oxford University Press, 2019: 490-514.

[20] Note that R&D is accounted for as a current expense, so only increments to R&D spending must be financed out of profits or other sources of funds such as depreciation, debt, or equity issues.

[21] Sara Salinas, “Intel’s Brian Krzanich is forced out as CEO after ‘consensual relationship’ with employee,” CNBC, June 21, 2018.

[22] Jeremy C. Owens, “Intel CEO sold millions of stock after company was informed of vulnerability, before disclosure,” MarketWatch, January 4, 2018.

[23] William Lazonick and Jang-Sup Shin, Predatory Value Extraction: How the Looting of the Business Corporation Became the US Norm and How Sustainable Prosperity Can Be Restored, Oxford University Press, 2020.

[24] Lenore Palladino, “The $1 Trillion Question: New Approaches to Regulating Stock Buybacks,” Yale Journal of Regulation, 36, 2018: 89–105; Ken Jacobson and William Lazonick, “License to Loot: Opposing Views of Capital Formation and the Adoption of SEC Rule 10b-18,” The Academic-Industry Research Network, forthcoming.

[25] SIA Board of Directors, “Letter to President Joe Biden,” Semiconductor Industry Association, February 11, 2021.

[26] Jacobson and Lazonick, “License to Loot”; Lenore Palladino and William Lazonick, “Regulating Stock Buybacks: The $6.3 Trillion Question,” Roosevelt Institute Working Paper, May 2021.

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30 comments

  1. Retaj

    The neoliberal disease caused Intel to fall significantly behind, and now they want a handout? This insomniac is not hopeful that the government will do the right thing.

    Reply
  2. Thomas P

    Intel 10 nm technology has the same transistor density asTSMC 7 nm, just using nm doesn’t say everything about a technology. Intel tried to push as many transistors as possible for the litographic size and ran into production problems. TSMC was more conservative, lowered dimensions but didn’t try to squeeze in as many transistors. To a significant extent Intel’s current problems stem from engineering hubris,

    Reply
    1. Lambert Strether

      > Intel’s current problems stem from engineering hubris

      Did you read the article?

      Those who exercise strategic control at Intel need to ask themselves why, in doing buybacks, they are showering cash on public shareholders who are merely stock traders looking for the most lucrative opportunity to rid themselves of the company’s shares. Part of the problem, as we have seen, is that those who exercise strategic control at Intel have been increasingly incentivized to focus on precisely this type of value-extracting behavior.

      For example.

      Reply
      1. Zamfir

        Intel spends absolute fortunes on R&D (and also capex), on top of those buyouts. Intel’s R&D budget is 4 times that of TSMC. In the crucial years where they lost their process lead, they had 8 times the R&D budget of TSMC.

        That comparison is somewhat misleading, as Intel is designing circuits for that money, and TSMC is not . But even taking that into account, it’s not simple lack of money that caused their current problems. Their spending on process alone was the largest in the world.

        With less buyouts, they could have spend even more , and they might have kept their lead. But I don’t think this is a guaranteed truth.

        Reply
        1. Fazal Majid

          Spending is no guarantee of outcome. A decade ago AMD was first to market with 64-bit x86 processors and were starting to eat into Intel’s market share despite Intel’s dirty tricks like requiring PC vendors to sign exclusivity deals to gain access to the most profitable high-end processors. It’s Intel’s small Israel R&D team that designed the Core architecture that saved them. I suspect Intel could have fired its entire expensive but improductive US processor engineering team and come out ahead.

          Reply
      2. Soredemos

        Sorry, but that isn’t where the blame for Intel’s decline fundamentally lies. I’m not saying they should be doing stock buybacks, because they shouldn’t be. But they didn’t exactly gut their R&D to do it. At no point were they ever spending less than multiple times what their rivals at TSMC and AMD were. I don’t think the definitive account of what exactly went wrong at Intel has been written yet, but they seem to have just gotten arrogant and lazy and been out-engineered. They spent year after year basically just doing minor refreshes of their 14nm architecture (where they still are, until at least the end of this year). Meanwhile AMD has completely lapped them, multiple times.

        Intel seems to have gotten complacent during the years they were absolutely steamrolling AMD (because AMD simply had much worse tech), and got lazy and overconfident that they could easily handle to leap to smaller architecture, which turned out not to be as simple as they thought it would be. Now they’re years behind at the factory level. They fired their chief engineer just last year. Meanwhile AMD was laser focused on specific goals, and was able to achieve them.

        Reply
      3. Peerke

        The problem is that stock buy backs insulate the stock price (and therefore option related incentive pay) from the downside of decisions of the management. So perversely companies like Intel take more risk than TSMC like companies. TSMC takes baby steps in technology in a fast cadence while Intel has taken large jumps. When it goes wrong for intel adjustments are made, belts tightened and more stock is bought. So the stock price does not reflect the failure.

        Reply
    2. DF

      IMHO, Intel’s 10nm tried too hard to leapfrog e.g. TSMC’s 7nm by trying to do a bunch of very ambitious stuff (2.7x density scaling, cobalt lower interconnects, etc.). They had their 10nm process producing one chip (poorly) in 2018. Thing is though, their 14nm process was heavily delayed as well, so 10nm wasn’t the first delayed process.

      In terms of subsidies — there’s really only three companies that do cutting-edge logic fabrication — Intel, Samsung Semiconductor, and TSMC. It sounds like we’re already throwing money at TSMC, so why not Intel as well?

      Reply
  3. Lambert Strether

    The lead comes at the end:

    Our policy recommendation for the Biden administration is simple: As a condition for giving the U.S. semiconductor industry $50 billion in infrastructure assistance, put a ban on [Semiconductor Industry Association (SIA)] members doing stock buybacks as open-market repurchases. That legislation can then be a first step in Congress rescinding the Securities and Exchange Commission’s Rule 10b-18—corporate America’s license to loot.[26] With a critically important company like Intel focused on innovation rather than financialization, the United States can get back to the business of building a world-class semiconductor-fabrication industry – one that leads rather than lags advances in technology.

    This is a good litmus test. I bet Stoller would like it.

    Reply
    1. Glen

      The COVID pandemic also expose serious manufacturing problems related to masks, chemicals and other areas. Wouldn’t it be prudent to rescinding this rule for those industries? I could make the same argument about defense contractors too.

      Or better yet, just rescind it period. Wasn’t this one of the changes under Reagan that has been fundamentally warping our de-facto national manufacturing policy to something along the lines of ‘who cares if I left a smoking hole in the ground where America had an industry – I got mine’?

      But given how Biden has pledged to his masters on Wall St to run things, “nothing with fundamentally change”, I doubt if Biden will do this.

      Reply
    2. eg

      Yes, this winking towards what used to be recognized as stock manipulation has long been a little recognized worm in the Wall St apple — here’s hoping an understanding of just how pernicious a problem this is increases significantly. Of course, the usual suspects will be lobbying hard to keep their grift going …

      Reply
  4. Ignacio

    For Intel as for other major U.S. corporations, the addiction to buybacks is hard to kick.
    Could we deem stock buybacks as a corporate opioid?

    Reply
    1. LP5

      There must be quite a rogue’s gallery of buybackers. They got theirs, and probably had some transactions that were influenced by non-public information.

      How many once-familiar companies fed at the buyback trough and then asked for handouts? Survivorship bias takes on a new meaning with the Intels of the world. Investors may forget about the companies that aren’t around due to bankruptcy, acquisition or even a name change. Add to that the short institutional memories that induce investors to chase after yield at companies handling their the stockholders’ money. Boards forget their fiduciary duties and need reminding by public display.

      Reply
  5. Deschain

    What I don’t see here is a discussion of how much TSMC and SEC spent on R&D and PPE. That would seem to be a critical part of the argument, no? If you are going to argue that Intel lost because money went to shareholders/execs instead of innovation, I think you have to show that they actually got outspent. Otherwise the problem might actually be how they spent, not how much.

    Reply
    1. Jim

      And (similarly) quoting:

      “Given the availability of these sources of funds, the vast sums that Intel has wasted on buybacks have not thus far imposed a cash constraint on its investments in semiconductor fabrication. Rather, it has been a deficiency in organizational learning—the essence of the innovation process—that has hampered Intel’s implementation of process technology.”

      Reply
  6. griffen

    Doing what the paymasters on Wall Street require instead of a corporate zeal to remain top dog, or even stay with the lead pack. But hitting a moving goal post to score a lucrative pay & comp package is now the American way!

    AMD is cleaning their clock, and prior management couldn’t deliver on a crucial target. You could find comparable examples of a leading firm that lost direction in the last 15 to 20 years. Boeing, and GE, for starters.

    Reply
  7. pebird

    Intel is the General Motors of the semi industry. Hang on to those old i3-327 and i7-454 chips, they will be worth $$ in the classic chip auctions of the future.

    Reply
  8. The Rev Kev

    Banning stock buybacks would be a sea change in the way that businesses are run. And it should be remembered that they were basically banned back in the 1930s. That is, until Ronnie Reagan had them made legal back in 1982 (Thanks Ronnie!). But I do not think that the political will is there to push it through. After the 2008 crash, US corporations that took money to bail them out from the Feds for their screw-ups had to put a ceiling in executive pay. And didn’t they squeal like stuck pigs till that money was paid back. So banning stock buybacks for any US company would have massive push-back from the financial markets who would see this as a threat to create a precedent. And Biden has always struck me as a path of least resistance sort of guy.

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  9. Marc Andelman

    If buybacks stop the stock market will collapse and bye bye to pensions and university endowments. If buybacks do not stop, supply will eventually shrivel and inflation will overtake us.

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  10. Sound of the Suburbs

    Free market thinkers have taken intellectual laxity to a whole new level.

    In the 1930s, the Americans found margin lending and share buybacks had artificially inflated the markets and this had lead to the Wall Street Crash of 1929.

    What lifted US stocks to 1929 levels in 1929?
    Margin lending and share buybacks.
    What lifted US stocks to 1929 levels in 2019?
    Margin lending and share buybacks.

    A former US congressman has been looking at the data.
    https://www.youtube.com/watch?v=7zu3SgXx3q4

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  11. Mikerw0

    I was quite disappointed by this post and do not believe it lives up to its billing, which is unusual for NC. I am sympathetic to the distortions caused by share repurchases on overall corporate health and performance. But,

    First correlation is not causation. Intel still invested a large amount, despite the money spent on repurchases. They are necessarily mutually exclusive. The real question I see in the numbers is did they spend their money on the right things?

    Second, history is littered with the carcasses of companies that were dominant in a generation or two of a technology only to be surpassed by others. The dilemma of defending one’s existing business over replacing it with something similar but new.

    Lastly, many of the numbers are focused on revenues, not income. We now, for example, that for many years in excess of 90% of profit in smartphones went to Apple with about 10% to Samsung. Everyone else lost money. Did Samsung, ET al, grow revenue quickly but not make much money while Intel was highly profitable?

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    1. Peerke

      Intel has a moat (albeit drying out) so profits are propped up by that. Also remember that the purpose of shrinking node size is to shrink die size (design held constant) and that is primarily economic. Transistor performance is involved also but that can be affected by other tweaks. So if a given company falls behind in node/density they can compensate economically in other ways up to a point and keep profit margins high. There is also the problem that the mostest bleeding edge technologies <10nm say are very much more complex processes and therefore much more expensive in terms of depreciation etc. But as far as RandD expenditure it is what you spend it on that counts, not necessarily how much you spend. Intel has set itself up to follow the Moorse’s law business model and produce huge jumps in economy and performance every two years. Stock buy backs as discussed earlier (by me) perversely encourage intel to stay on this course while TSMC takes baby steps to keeps its many customers happy with minimum risk. It seems now that at least for Pat Gelsinger that the penny has dropped and more foundry like future (IDM2.0) awaits. Logically this means stock buy backs should no longer be necessary since the risks will be reduced and the stock price no longer in need of propping up.

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  12. Harrold

    Intel CEO Paul Otellini is famous for turning down Steve Jobs when he asked that Intel provide the CPU for Apple’s new upcoming iPhone.

    Intel at the time owned XScale, an ARM chip producer.

    Otellini turned down Jobs and sold off XScale, competing with Hewlett Packard’s decision not to build Jobs & Wozniak’s new computer as the worst business decision in high tech history.

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  13. John Emerson

    Between the financialization of industry and the impoverishment of government and the social sphere, Hayek’s and Friedman’s memories should be blackened. James Buchanan was even worse, though more completely aware of what he was doing (steepening hierarchy and creating an excluded underclass).

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  14. Jan Wiklund

    It began long ago! Alfred Chandler tells in Inventing the electronic century how the corporation that dominated radio business, RCA, squandered its money at “diversification”. it simply bought profitalbe businesses of any kind – fx Hertz – instead of getting better on radios. So the Japanese took over.

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