By Charles King, Pund-IT, Inc. April 20, 2016
Silicon Valley has been so successful in cultivating a mystique around technology that it’s easy to forget that most vendors are in the manufacturing business. That is, they make stuff, mostly by assembling commercial off the shelf (COTS) components, such as microprocessors, memory, motherboards and displays made by yet other manufacturers.
As a result, the hardware portion of the IT industry is sensitive to the same yield/volume/margin pressures that impact other manufacturers. If acceptable quality (yield) products can’t be made in workable numbers (volume) and sold profitably (margin), the larger structure wobbles. If that situation persists or worsens, the vendor risks injury or even collapse.
Though this dynamic is common across the IT industry, its effects are anything but equal. Consumer-centric products tend to be less stable since sales depend on often unpredictable customer preferences. But that’s balanced out by such products being generally cheaper and easier to build.
In contrast, making business-focused products is typically more complex and demanding but is also considerably more profitable. So it’s quite common for large scale component manufacturers to develop product lines that span a range of consumer and business applications.
Restructuring by the numbers
I bring this up to provide some context to the restructuring initiative announced yesterday by Intel which for many years has been one of the IT industry’s most effectively balanced businesses.
In essence, the company intends “to accelerate its evolution from a PC company to one that powers the cloud and billions of smart, connected devices.” The reasons for this decision are pretty straightforward. According to Intel, its data center and Internet of Things (IoT) businesses have become its “primary growth engines,” aided by memory and field programmable gate array (FGPAs) sales to fuel “a virtuous cycle of growth.”
Collectively, revenues from these businesses grew by $2.2B last year and “accounted for 40% of Intel’s revenues and the majority of its operating profits, which largely offset declines in the PC market segment.” In other words, revenues and profits from considerably less than half of Intel’s businesses are propping up the remainder.
That is not a sustainable situation.
The restructuring initiative Intel outlined focuses on increasing investments in product areas that “will fuel revenue growth and drive more profitable mobile and PC businesses.” These include data center, IoT, memory and connectivity solutions, and client areas such as 2-in-1s (laptops that also function as tablets), gaming and home gateways.
As a result of the initiative, Intel expects to save $750M this year and to achieve annual run rate savings of $1.4B by mid-2017. The initiative will also lead the company to record a one-time charge of $1.2B in the second quarter.
How it will achieve that will be anything but easy or comfortable for Intel and its employees. Worldwide site consolidations and reevaluation of company programs will result in up to 12,000 workers voluntarily or involuntarily losing their jobs.
To its credit, Intel intends to act decisively by communicating with the majority of affected workers within the next two months. That won’t lessen the pain of job loss but it’s a far better approach than the slow and unpredictable bloodletting that some other companies pursue. It also underscores the commitment Intel CEO Brian Krzanich noted in a letter to employees, to help affected workers through the transition, “with the utmost dignity and respect.”
What are we to make of all this? A couple of things stand out. First and foremost, Intel appears to have decided that it can’t wait any longer for a hoped-for revitalization of traditional PC markets. That doesn’t mean that PCs are dead by any means. As my colleague Roger Kay of Endpoint Technologies points out, PC sales continue to average $30B per quarter, a healthy sum for so mature a market.
There will likely be occasional upward spikes in sales related to new features, vendor innovations and businesses upgrading their office environments, but the salad days of the industry, when people camped out overnight to buy new PCs, are receding into the past. So while Intel will continue to support and evolve traditional client products, it will invest more actively in areas with higher margins, like 2-in-1s, gaming systems and home gateways.
Second, Intel is increasing its bets on business computing, including data center, IoT, memory and connectivity solutions. This makes perfect practical sense since it builds on the company’s current success in those areas. But it also works strategically by opening new business opportunities and spurring future growth. IoT could be an especially fruitful area since it plays to Intel’s data center leadership position and its strengths in mobility.
Intel’s restructuring initiative certainly brings to mind the company’s recent disappointments but also highlights its willingness to come to grips with those challenges. No organization undertakes such an effort lightly, and the gravity of the situation was underscored by Intel’s announcement and CEO Brian Krzanich’s letter to company employees. But the clarity of purpose and strategy behind the initiative seem likely to lead Intel toward the success it envisions.
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