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Intel Chip Shortage Continuing

Written By: R. Krause
Published On: February 7 2000

Event Summary

1/26/2000 - Dell Computer Corporation said it expected a revenue and earnings shortfall for this quarter. Among the reasons stated was a shortage of chips from Intel Corporation. Dell claims it lost approximately $300 million in sales due to its inability to meet demand for its high-end PCs. Intel is blaming the shortage on "upside demand", which means demand for the particular chips was significantly higher than forecast. In a recent statement, Intel has said it expects shortages to continue at least through February and possibly March.

"We've been able to meet our commitments. But we hadn't, in Q4, been able to meet upside demand," said Intel spokesman, Howard High. "We're still, as a company, working to get our capacity levels up to this (new) level that the industry is building (PCs) at."

Dell chief financial officer Thomas Meredith said the shortages also forced Dell to ship more expensive components in place of those it could not get, for example, replacing unavailable 450MHz Pentium III chips with more expensive 500MHz Pentium III chips. "We ate that difference in order to fill the demand that we created," Meredith said. On the high-end, "We didn't get the volumes we would have liked."

These problems come on the heels of the highly-publicized complaints by Gateway that Intel was unable to keep up with Gateway's requirements, resulting in lost revenues for Gateway.

Intel expects that its newest fabrication plant (to be called Fab 22), along with $800 million worth of its updates to its Hudson, Mass., fab, should help ease its supply situation in the long run.

Short-term relief should come from conversion of the company's New Mexico-based Fab 11 to manufacture processors on Intel's 0.18-micron process. This should be complete by the end of this quarter, High said. Fab 22, Intel's first fabrication plant to use 300mm wafers, is expected to come online in 2001. In addition to supply issues, there are also concerns about the Pentium III's "flip-chip" design - a package not uncommon in the industry, but new to Intel.

Market Impact

This is the latest in a series of problems for Intel. Although it is still the 800-lb. gorilla in the CPU market, it seems to be doing its best to provide an opening for Advanced Micro Devices to gain parity. After Intel muscled AMD out of Gateway through price cuts (See TEC News Analysis article: "Gateway Drops AMD"), it only took them about three months to blow the deal (See TEC News Analysis article: "Gateway, Jilted by Intel, Kisses and Makes Up with AMD"). Compound this with the bad press from the delays for the Coppermine chip, and the Rambus "fiasco", and Intel starts looking vulnerable.

But for Intel, like Scarlett O'Hara, there's always Tara, a/k/a Dell. Dell's success has been partly due to its extremely close relationship with Intel, and thus Dell is still an Intel-only house. We would have been surprised had Dell announced it was going to second-source AMD after only one quarter of missed deliveries. Michael Dell, however, is too good a businessman not to consider the AMD alternative. Our only question is whether it will be two strikes or three before Intel has company as Dell's CPU supplier.

AMD must certainly be happy about this, but obviously should not get complacent. In addition to capitalizing on Intel's woes in the present, they must also look to the future. The 300mm wafers to be used in Intel's "Fab 22" do not threaten AMD presently, but AMD will need to have its own 300mm facility to maintain a lower cost structure.

User Recommendations

This announcement has its greatest short-term effect on users committed to Dell and needing either the latest, greatest Pentium III CPUs or certain Celeron (low-end) CPUs. Those users will find shipments delayed until March, since Intel has made it clear that the shortages will continue. Users need to get concrete/fixed dates from Dell, and then decide if the delivery schedules (if delayed) are acceptable. If they are not acceptable, customers have the fallback of purchasing from Compaq, Gateway, or Hewlett-Packard - Dell's competitors who carry both AMD and Intel.

The long-term effect on users will be that competition between Intel and AMD will intensify, which should result in some pricing benefit to users. Naturally, when competitors get closer to parity, consumers benefit.

 
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