What happened to Intel?

On Monday, Intel CEO Pat Gelsinger abruptly decided to retire after less than four years on the job. That was the official story, anyhow. Within hours, Reuters, Bloomberg, and The New York Times had a different one: the board of directors pushed him out. 

Three and a half years ago, Gelsinger announced an ambitious plan to turn around the troubled chipmaker within four years — now, he’s reportedly been kicked out of the company before he could see it through. It happened so abruptly that Intel doesn’t have a planned successor in mind, and so completely that Gelsinger won’t even stick around as an adviser. He’s gone.

Intel has been in a tailspin for years. It missed the smartphone revolution, has been plagued by quality control issues with its chips, lost customers like Apple to alternative processors, and now is at risk of missing out on AI, too.

If Intel is falling apart, this isn’t just a business story. The United States government has called it a national security story, too. Intel isn’t just the world’s former leading maker of computer chips; it’s one of the last companies to both design and manufacture them itself instead of outsourcing the latter part to Asia. It’s one of the only levers the US can pull to reduce dependence on Taiwan for chips, should China decide to exert control. Some of that might be in jeopardy because of what Intel’s management has or hasn’t done — or might newly be in jeopardy now that the board has kicked Gelsinger out.

Was he that much of a disappointment? Is something else going on? Here’s what we know about Intel’s situation.

Why were people so excited about Gelsinger to begin with? 

He bled Intel blue. Gelsinger was a lifer who joined the company at age 18 and spent 30 years on the job, from 1979 to 2009, before returning to lead the company in 2021. Even some people who’ve left Intel as a result of Gelsinger’s layoffs tell me they believed he was the right person for the job. They believed in his strategy to regain silicon leadership, they liked that he was an engineer himself, and they liked that he was there to fix long-standing technology problems left (or ignored) by previous CEOs. 

Remember the 486, Intel’s 1989 flagship CPU that was the first x86 chip with over a million transistors? Gelsinger was the lead architect. Later, he became Intel’s first CTO, helping push industry standard technologies like USB and Wi-Fi as well as Intel chip design. 

Just how bad was it before Gelsinger took the top job?

Not great! There were bad bets, multiple generations of delayed chips, quality assurance issues, and then Apple decided to abandon Intel in favor of its homegrown Arm-based chips — which turned out to be good, seriously showing up Intel in the laptop performance and battery life realms. We wrote all about it in “The summer Intel fell behind.”

Intel had earlier misses, too: the company long regretted its decision not to put Intel inside the iPhone, and it failed to execute on phone chips for Android handsets as well. It arguably missed the boat on the entire mobile revolution.

How did Gelsinger plan to turn things around?

In a way, it all comes down to reversing one mistake, the ultimate bad bet — the one where Intel funded the technology that its competitors used to leap ahead.

Over a decade ago, Intel spent billions investing in Dutch multinational ASML, which is today the most important company in chips. It’s the only firm in the world that manufactures machines capable of pulverizing a ball of tin, using high-power lasers, such that it emits an extremely tight wavelength of ultraviolet light to efficiently carve circuits into silicon wafers, a process known as EUV.

Intel initially believed in the tech, even carving out a $4.1 billion stake in the company, then decided not to order the pricey machines. But Taiwan’s TSMC did — and went on to become the undisputed leader in silicon manufacturing, producing an estimated 90-plus percent of the world’s “leading-edge logic chips.” Samsung ordered machines, too.

Gelsinger was not shy about calling Intel’s choice “a fundamental mistake” in our 2022 interview. “We were betting against it. How stupid could we be?”

So Gelsinger decided to embrace EUV, while simultaneously giving its technology departments a blank check to leapfrog TSMC. “I said, ‘You have an unlimited budget, and you are going to deliver five nodes in four years. We are going to get back to unquestioned process leadership.’”

Gelsinger wanted to build the capacity to actually produce those chips in volume, too, investing tens and even hundreds of billions of dollars in new factories in the United States and finally offering up its chipmaking services to competitors to secure business for those fabs.

Five nodes in four years?

That’s been Intel’s catchphrase ever since. Literally, it means that Gelsinger promised his company would deliver five different generations of product, each with a smaller size of transistor than the last in just four years. If you’ve ever heard of Moore’s Law, you know that shrinking down the circuits to fit more transistors is one of the key ways that chips improve, but historically, Intel would only shrink its chips every other year — known as the “tick-tock” release cycle. Five shrinks in four years was seen as wildly ambitious.

What’s more, Gelsinger didn’t just promise to catch up; he promised Intel would lead in silicon technology again by 2025, the end of his four-year plan.

That’s how it started. How’s it going?

Intel has consistently been “on track” to deliver five nodes in four years, but it’s come at an incredible cost — in the literal tens of billions of dollars spent on foundry, in the many additional misses Intel made along the way, in the company’s halved value as measured by its stock price, and according to one former employee I spoke with, in morale.

“The amount of layoffs in the last two years has completely destroyed morale. You make it through one round, then you don’t know if you’ll be eliminated in the next round 3-6 months later. The mental toll of that makes people put in the bare minimum, become apathetic, and ultimately go elsewhere,” that ex-employee tells me. (In August, Intel announced it would lay off over 15,000 employees and stop all nonessential work.)

Even though Intel’s core businesses are still profitable on their own, revenues have declined — two former employees also suggest Intel spent too much on preparing its future foundry business while cutting costs on the products it shipped in the meanwhile. In particular, one claims that Intel’s Meteor Lake and Arrow Lake CPUs were supposed to have a special “Adamantine” cache that could have helped them beat the competition: “It would have been significantly more competitive to the point it would kick Zen 5’s ass, but was cut for cost reasons.”

Meanwhile, it’s not clear that Intel is truly positioned for silicon leadership — particularly now that the concept of “leadership” has zigzagged to places that Intel wasn’t prepared for it to go. While Nvidia has become the world’s most valuable company thanks to the AI gold rush, and AMD is following Nvidia’s lead, Intel’s own Gaudi AI accelerator couldn’t even meet Gelsinger’s softened revenue promises of $500 million in a year.

In an environment where data center businesses are focusing their dollars on GPUs instead of CPUs, it’s a bad time for Intel not to have any real strength in the graphics space despite spending years attempting to gain just that. “It steals revenue from the data center business at a time you need that revenue to drive this phenomenally expensive strategy,” one ex-insider tells me.

Intel’s image as a leader also hasn’t been helped by the fact that two previous generations of desktop CPUs were found susceptible to permanent damage, how its latest desktop processors shipped with performance issues, or how Microsoft followed Apple’s lead in ditching Intel chips for its latest consumer devices and launched its Copilot Plus PC initiative exclusively with Qualcomm instead.

And while Intel’s totally overhauled Lunar Lake laptop chips did look intriguingly like the company catching up to competition, Intel eventually revealed they were something of a financial mistake, a one-off that relied too much on external partners, including Intel rival TSMC.

Even if we’re talking silicon technology process, not whole products, there’s a worrying possibility that Intel might not be close to beating TSMC when its all-important “18A” process arrives next year. The New York Times had this to say in a story about Gelsinger’s departure:

Some customers were recently informed by Intel that its most advanced manufacturing processes, which it calls 18a and 16a, were far behind TSMC, a chip industry official briefed on Intel’s progress said. TSMC is producing 30 percent of its leading-edge chips, known as 2 nanometer chips, without any flaws, while Intel’s new process produces less than 10 percent of its 18a chips without flaws, the person said.

It’s not the first time a report has suggested 18A might not be ready.

Didn’t Intel see AI coming? Why didn’t it ride that wave, too?

It did, and it could have, Moor Insights & Strategy chief analyst Patrick Moorhead tells The Verge. “They bought some very good companies, they built a GPU for high performance computing called Ponte Vecchio,” he says — but Ponte Vecchio was designed for floating point operations that weren’t useful for the large language models that drive today’s generative AI gold rush, he explains. “The market went to low precision TOPS.”

“AMD was able to redo their design and their architecture very quickly, but Intel was not, and that’s the issue,” says Moorhead. “I don’t think it was a focus for them.” One ex-insider also suggests Intel has a long history of acquisitions that it failed to properly integrate into the larger company — and that Nervana, in particular, a company that was building inference and training chips to compete with Nvidia, was smothered in the attempt.

While Moorhead says there’s nothing “wrong” with Intel as a company, the optics around AI are terrible for Intel. “How can your business be shrinking in the data center while Nvidia is up so much and AMD is doing well?” While Intel does have other AI products on the way, with Falcon Shores slated for 2025, it looks an awful lot like Intel missed the boat on AI, the same way it missed the boat on mobile years ago. 

That’s not clear, but the source that spoke to Reuters, Bloomberg, and The New York Times told each that the board lost confidence in his plan:

“Directors felt Gelsinger’s costly and ambitious plan to turn Intel around was not working and the progress of change was not fast enough”

“Pat Gelsinger was forced out after the board lost confidence in his plans to turn around the iconic chipmaker”

“Intel’s board had concluded that Mr. Gelsinger had to depart after his plans to turn around the iconic semiconductor maker were not showing results quickly enough”

Additionally, Bloomberg cited a concern about product quality:

At last week’s meeting, he faced concerns focused on the lack of products capable of winning in the market — something the board felt had been neglected in the push toward turning Intel into a made-to-order chip manufacturer.

It could be that the company’s financials are finally too dire to ignore: at the end of 2023, Intel was still making a $2.7 billion profit overall, but it lost $437 million in Q1 2024, $1.6 billion in Q2 2024, and a staggering $16.6 billion in Q3 2024, its worst in history, though that last one is mostly Intel’s restructuring bill. The Q2 2024 financial results and forecast were deemed so surprisingly bad, even the layoffs didn’t appease investors: the stock dropped 26 percent in one day.

Public scrutiny has also increased following Intel’s losses and layoffs: The New York Times and Reuters also recently ran big stories questioning Gelsinger’s leadership, titled “The White House Bet Big on Intel. Will It Backfire?” and “Inside Intel, CEO Pat Gelsinger fumbled the revival of an American icon.” Intel is facing a couple of investor lawsuits over its previous predictions, too.

Moorhead and one ex-insider tell me that one reason investors (and thus the board) may have lost confidence is that Gelsinger incorrectly “called the bottom” too early, confusing investors, like how Intel announced an austerity period in 2022 that resulted in salary cuts and freezes to save some jobs, then wound up doing the layoffs in 2024 anyhow.

But Moorhead and Creative Strategies analyst Ben Bajarin both believe Gelsinger’s departure was so sudden, it can’t simply have been the straw that broke the camel’s back. “There must have been a decision the board made that he was not going to stick around for,” Moorhead tells me.

His hunch: Intel’s board may want to split off its foundry business entirely, above and beyond the spinoff that Gelsinger already announced, turning Intel into a company that simply designs chips like its direct rivals.

Intel rival AMD is the precedent — in 2008, AMD became a “fabless” chipmaker by spinning off its manufacturing business into a company called GlobalFoundries, which is now reportedly the third-largest chip foundry in the world after initially serving AMD. (Incidentally, Intel was reportedly eyeing GlobalFoundries as a possible acquisition target in 2021.)

But Intel can’t spin off its own foundries very easily, particularly now that it’s receiving nearly $8 billion in CHIPS and Science Act funding from the US government. That money not only keeps Intel from engaging in stock buybacks for the next five years but also specifically gives the US Department of Commerce oversight over any change of control. If anything would see Intel own less than 50.1 percent of the new company or lose its voting rights, the Commerce Department wants to make sure Intel will still fulfill its US manufacturing promises. That could make it difficult to fully spin out.

“The economics of Intel’s foundry are so challenged that I don’t know how a spin-off is even feasible without a massive cash infusion,” Bajarin writes. “Ultimately, I hope a buyer for Intel Foundry emerges who can help the US gain an edge in domestic semiconductor manufacturing, as this is far more strategically important geopolitically than many realize.”