Intel's $7 Billion Gamble... Too Much? Too Soon? (INTC, AMD, NVDA, AMAT, KLAC, NVLS)

Intel Corporation (NASDAQ: INTC) is making a huge gamble on high- paying jobs and manufacturing.  It isn’t cuts.  Intel plans expansions for the inevitable recovery ahead.  $7 billion worth.

The company plans to spend $7 billion over the next two years to build advanced manufacturing facilities.  The good news is that these builds are in the United States rather than China, Mexico, or elsewhere.

This will lead its 32 nanometer manufacturing technology that will be used to build faster, smaller chips that consume less energy.  Intel believes these chips will become the basic building blocks of the digital world.  It also looks like its largest investment in company history for a new manufacturing process.

The investment will be made at existing manufacturing sites in Oregon, Arizona and New Mexico.  If you read into what the company is saying, it really has a “US-Centric” feel to it.  This is part of a total Intel workforce of more than 45,000 in the U.S., where the company says accounts for more than 75% of its sales overseas, carries out roughly 75% of its semiconductor manufacturing in the U.S., and about 75% of its R&D spending and capital investments are also made in the U.S.

“Westmere” is the family codename of the chips and will initially be used in desktop and mobile mainstream systems that combine high-performance micro-architecture with graphics capability integrated into the processor.  The start of the roll-out is slated for 2009 and then into 2010.

Here is where we take issue.  First off, we commend the company having the foresight to plan for when growth does inevitably return.  But there is an issue of the timing.  If the “growth resumes from a much lower yardstick” as it signaled before, then this may just be to keep competitors from getting an extra leg up.  That would either be Advanced Micro Devices (NYSE: AMD) or take aim at NVIDIA (NASDAQ: NVDA).  Intel killed AMD in the past.  It was able to leap-frog the lesser company after AMD initially surpassed it in the dual-core arena.  That AMD advantage didn’t last long.  Either way, this sounds like it could come at a large expense at a time when pinching pennies is “the new cool.”

But this is a win for semiconductor cap-ex and equipment makers. Applied Materials Inc. (NASDAQ: AMAT) reports earnings today.  Shares popped, but then dropped.  We are also seeing a mixed bag in shares of Novellus Systems, Inc. (NASDAQ: NVLS) and KLA-Tencor Corporation (NASDAQ: KLAC).

We hope the company is getting some extra tax credits or at least some state subsidies for this.  Otherwise this is going to just bite into margins over the next two years.  Consumers are buying more and more of these cheap PC’s and netbooks, and that is going to be a hard habit to break for much of the country (and world).

Jon C. Ogg
February 10, 2009