Intel Provides Clarity on Internal Foundry Model: A Commitment to Accountability

**Intel’s Introduction of IDM 2.0 Model and the Role of Intel Foundry Services (IFS)**

**Intel’s New Approach to Accountability**

Last week, Intel hosted an investor Webinar to provide a detailed explanation of its new IDM 2.0 model and the integration of Intel Foundry Services (IFS) within this framework. The most significant revelation from this webinar is the restructuring of Intel’s Technology Development (TD), manufacturing, and IFS units. These units are now grouped together and given their own profit and loss (P&L) responsibility. This marks a departure from Intel’s previous working model, where operational costs were allocated to specific business units (BUs) like IFS, CCG, DCAI, and NEX, without the BUs being directly accountable for their behavior.

Under the new IDM 2.0 model, the BUs within Intel are now accountable for the costs associated with their manufacturing decisions, similar to fabless semiconductor companies working with third-party foundries. This move, spearheaded by CEO Pat Gelsinger, aims to foster greater accountability throughout the organization. David Zinsner, Executive Vice President and CFO at Intel, emphasized the critical nature of this shift for Intel’s future strategy. Furthermore, Intel anticipates a reduction of $3 billion in manufacturing costs by 2023 and a staggering $8 billion to $10 billion by 2025. Zinsner stated that Intel is on track to achieve $3 billion in savings this year, with a breakdown of $2 billion in OpEx reduction and $1 billion in cost of sales, details of which will be disclosed in the company’s Q2 earnings report in July.

**Standardized Pricing and Benchmarking for Services**

With the TD and manufacturing units now charging the BUs for their services, Intel has introduced standardized pricing for the four BUs, including IFS. These pricing benchmarks are based on comparable metrics from competing semiconductor foundries and outsourced semiconductor assembly and test (OSAT) vendors. This pricing alignment places Intel’s TD and manufacturing units on equal footing with external vendors. Consequently, the BUs have the flexibility to seek foundry and OSAT services from outside vendors if they believe they can secure a better deal. These arrangements align with Gelsinger’s mission to restore Intel’s competitive stance within the semiconductor industry.

**Driving Accountability and Transparency**

The adjustment to Intel’s financial model aims to address the lack of transparency that has historically obscured the true economics of the TD, manufacturing, and IFS groups. These groups account for approximately 40% of Intel’s headcount, 25% of OpEx, and over 90% of CapEx. Intel’s new model, which incorporates a dedicated P&L for manufacturing, facilitates the identification of cost reductions and fosters greater accountability. This enhanced transparency enables the financial performance of Intel’s teams to be directly measured against their peers. By solidifying the connection between decisions and costs, accountability is strengthened throughout the organization.

Jason Grebe, Corporate Vice President & General Manager of the Corporate Planning Group at Intel, highlighted one specific challenge that prompted these changes. Intel observed that the emphasis on expedited material requests disrupted factory efficiency and impacted the overall implementation of toolsets. To address this, Intel is introducing financial disincentives for BUs to expedite material, encouraging them to carefully evaluate the necessity of such requests. The objective is to minimize expedited material and, whenever possible, eliminate it entirely. By tracking and charging for these expedited services, the manufacturing group aims to establish a more rational customer/supplier relationship with the BUs.

**Accountability and Competitiveness**

While these changes undeniably impact the behavior of the BUs at Intel by holding them directly responsible for manufacturing costs, their effect on the manufacturing group’s cost reduction efforts and competitiveness within the industry remains less clear. Additionally, the impact on TD’s development of new process nodes, an area where Intel has seen some setbacks, is a matter of interest. Zinsner provided clarification on these fronts, highlighting that the new P&L structure incentivizes internal and external foundries to focus on revenue growth and loading their fabs. Consequently, their success is contingent on efficient operations and cost management. If Intel’s manufacturing group fails to prioritize operational costs and competitiveness, its P&L will suffer. Similarly, if TD is unable to develop advanced process nodes in line with or surpassing the development schedules of competing foundries, the P&L will be adversely affected. Moreover, the ability of IFS to attract external customers for its services will also play a significant role in its P&L performance.

**A Return to Accountability**

CEO Pat Gelsinger, influenced by his mentor Andy Grove, is reintroducing a strong sense of accountability to Intel. Gelsinger’s efforts demonstrate his commitment to address a corporate problem identified by Grove, who famously said, “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Though Gelsinger may not exude Grove’s level of paranoia during his tenure as Intel’s CEO, he is undoubtedly demonstrating the ability to walk in Grove’s footsteps.

In conclusion, Intel’s implementation of the IDM 2.0 model and the integration of Intel Foundry Services (IFS) within this framework mark a significant shift towards greater accountability and cost management. By charging BUs for their services and introducing standardized pricing, Intel ensures transparency and fosters a more rational customer/supplier relationship. However, the impact of these changes on the manufacturing group’s efficiency, TD’s development efforts, and IFS’s customer attraction will be crucial factors in their performance under the new model. Overall, Intel’s commitment to accountability and competitiveness sets the stage for a resurgent future within the semiconductor industry.

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