I was really worried about Intel’s CEO selection. The only external candidate who could likely do a good job at the company, given its unique culture, was Pat Gelsinger. However, he is quite content running VMware and has been far removed from microprocessors for several years now, making him both unlikely to be offered the job and unlikely to take it.
Intel has a massive fabrication capability that is unique in the market because the other vendors have gone fabless, and an external hire, likely knowing very little about this part of the business and hired because of mobile market knowledge, would have probably either tried to sell it off or mismanaged it. So Intel went inside and this selection of Brian Krzanich came as a surprise, though the selection of Renee James as president may be an even more aggressive and interesting move.
Let me explain.
Fab: Asset or Liability?
The current market for semiconductors has largely gone fables, which means manufacturing is outsourced to another company. This has the advantage of better assuring the fab is populated because the manufacturing entity can get business from a variety of companies to fill it.
The downside is that it generally takes longer to advance technologically and there are higher risks that a unique manufacturing advantage developed by one semi-conductor company will be available more quickly to others through the fab. So you get a reduction in financial risk in exchange for some loss in time to market and IP security. Apple clearly appeared to experience this last with Samsung, which built a lot of the parts used in Apple devices and goes to the core of the litigation that is going on between the companies.
The other issue with the trend to going fabless that we discuss less often is the trend to do development for the processors in house, eliminating the fabless company as redundant. Apple has its own internal processor developers, as does Microsoft (though we see less of them outside of the Xbox) and with the move to the fabless model, the risk that a company might become redundant increases.
Finally, it appears the move to this fabless model and ARM has resulted in a massive amount of low-quality product entering the market from China. Intel and others have had knock-off problems before with people selling chips branded as if they were from the companies but which were inferior and unauthorized. With ARM, this same quality of part has been flooding the bottom end, leading to an increasing number of very low-quality tablets and phones emerging mostly in Asia but starting to drift to the Western World. This can kill a market as consumers start connecting the related segment to a very low-quality experience. So the market move to a fabless structure has had a rather impressive cost.
Playing the Game You Know
However, the stronger argument for Intel to double down on doing its own manufacturing is that this is an Intel strength and it does it arguably better than anyone else. A strong rule of thumb in a market with competition is to play the game you know, and never play the other guy’s game. You see the opposite of this going on with Apple and Samsung right now from the Apple perspective. Apple is shifting to play Samsung’s game, not forcing Samsung to play theirs and Samsung is on the ascension while Apple is falling.
This move suggests that Intel will be using its fabrication capability as a strategic weapon to bring technologies to the market more quickly both in terms of in-part capability and manufacturing efficiency. It is risky because it moves against the trend but is far less risky than trying to chase the other vendors from behind and it should allow the company to maintain competitive advantages both in parts and in the speed it brings new capabilities to market.
However, the more disruptive move may be the selection of Renee James as president. She was very close to Andy Grove, one of the most powerful CEOs in the firm’s history and also the most well-regarded. He had the ability, which the CEOs who followed him couldn’t match, to pull the company together and drive it while keeping employee turnover low and employee loyalty high. She comes in with a strong record with successful acquisition management that is market leading, showcasing the unique skills of a CEO early and appears to be next in line for the CEO spot behind Brian Krzanich. This gives Intel back a strong succession plan and puts one of the best-trained CEO candidates in the market at the top tier of it.
Her focus on acquisitions and software should provide Intel with greater breadth and speed up the integration of technologies from existing acquisitions like McAfee into Intel’s core technology. Of the two moves, Krzanich is the more tactical and James the more strategic.
Wrapping Up: Nicely Done
I’m often appalled at the choices boards make for CEOs, largely because companies don’t do a good job of preparing internal candidates to take over the top company spot. Intel and IBM stand out as firms that have typically groomed executives very well to run the company and there was some concern that recent changes in Intel had broken that model. Not only has that proven not to be true, but the selections made to run the company are in line with the firm’s existing strategic advantages and better position the company for the future than the mobile-focused alternatives from outside that appeared both more likely and had far less potential for success.
These moves clearly don’t take Intel out of danger, the mobile market continues to erode its more traditional PC products, but they put Intel in a position to fight back from traditional strengths rather than weaknesses and that is typically the far better way to approach any competitive problem.