Intel Cuts Production Costs

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April 13, 1998 (7:10 AM EDT)

By Jack Robertson,

Intel amazed industry analysts by making a quick midcourse correction in fabs to cut production costs for its new Celeron low-priced Pentium II version.

As part of the cost-cutting, Santa Clara, Calif.-based Intel (company profile) canceled or delayed major fab-equipment orders totaling as much as $100 million with up to five vendors, according to industry reports. Analysts attributed the cuts to a quick switch to manufacture a profitable Celeron chip, not to any slowdown in microprocessor production.

Analysts said Intel recently canceled about $30 million in orders with Kulicke & Soffa, in Willow Grove, Pa., for 155 unique advanced wire bonders that the vendor was building solely for the microprocessor giant. They added that the company was only one of several Intel equipment suppliers that had received order cancellations this month. K&S officials would only confirm that a major customer had canceled the $30 million order for bonders.

Morgan Stanley & Co. reported that the K&S cancellation was triggered by Intel's decision to use equipment already installed in its fabs. Other analysts said this was part of Intel's quick-change strategy to cut production costs for Celeron, and probably other chips, as well, by extending the life of existing gear.

"As a scaled-down Pentium II processor, Celeron doesn't need the next-generation production equipment Intel has been buying," said Byron Walker, analyst with Alex Brown & Son, in New York.

Intel is expected to scale back its 1998 capital equipment budget by several hundred million dollars from the originally projected $5.3 billion, according to a consensus of Wall Street analysts. That would still leave Intel's semiconductor capital spending in the $5 billion range -- more than two-and-a-half times the investment of the next closest chip investor, Motorola, which is expected to spend $2 billion in capital investment.

An Intel spokesman declined to comment on any aspect of the reported equipment-strategy changes. If the company adjusted its 1998 capital-spending budget, any changes would be announced Tuesday as part of Intel's quarterly financial report, he added.

G. Dan Hutcheson, president of VLSI Research, in San Jose, Calif., said he was "amazed at how fast Intel was able to adjust production to lower costs" in making the lower-priced Celeron chip. "Giant companies usually can't react as quickly," he said. "When Intel saw the surprisingly strong growth of the sub-$1,000 PC, they moved immediately to change production strategy to make Celeron at a competitive price."

Intel's two-year delay in its projected new fab in Fort Worth, Texas, announced last month, also will cause some cuts in the 1998 capital spending budget-although the peak of equipment spending for the Fort Worth fab would have come next year. The delay in Intel's acquisition of the Digital Equipment fab in Hudson, Mass., also is slipping some capital spending this year. Intel had projected some $700 million for upgrading the Hudson fab to state-of-the-art 0.25-micron wafer production.

At the same time, Intel will invest heavily to install a next-generation 300-millimeter wafer pilot line at its development fab in Hillsboro, Ore., expected to come on line next year. Unlike the economy-priced production strategy for Celeron, the new line requires totally new, leading-edge systems to make the larger-sized wafer.

Intel is also investing heavily to ramp up for next-generation 0.18-micron feature-sized processes as quickly as possible. The 64-bit Merced microprocessor, to be introduced next year, initially will be made on 0.18-micron lines and quickly migrate to 0.15-micron process technology.

Intel said it hopes its new leading-edge processing -- well ahead of anyone else's in the industry -- will give the company a competitive jump over its microprocessor-unit clone rivals.

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