Amidst a bevy of bad news in the PC market, Intel took two corrective steps this week, aggressively slashing prices on chips on Monday and announcing Wednesday that it would close four chip plants and cut as many as 6,000 jobs.
Analysts laid the blame for Intel’s actions on weak PC sales combined with tight-fisted consumers choosing low-cost models such as netbooks. They also said impressive new CPUs from rival Advanced Micro Devices (AMD) were a factor.
Monday’s CPU price cuts by Intel, as much as 40 percent on some high-end desktop chips, were aimed at “stimulating demand to consume [chip] inventory,” said Ian Lao, an analyst with In-Stat . “Fabs are already scaling back but there is always a buffer effect from when a change is started until we see that change on the street. They are trying to match the fab capacity to help limit job cuts if possible.”
The price cuts were just the beginning. On Wednesday, Intel said it would close close two assembly and test facilities—one in Penang, Malaysia, and another in Cavite, the Philippines. It said it would also stop production at two wafer-production plants: Fab 20, an older 200mm wafer fabrication plant in Hillsboro, Oregon; and D2, a facility in Santa Clara, California.
The changes will affect between 5,000 and 6,000 employees worldwide, Intel said. Not all those employees will lose their jobs, however, as Intel plans to offer some of them positions at other facilities, the company said.
Intel will gradually close the facilities between now and the end of 2009, it said. The closures are designed to “align its manufacturing capacity to current market conditions,” the company said.
Like many technology companies, Intel has been hit hard by the U.S. recession, which also has affected the global economy. For its fourth quarter ended Dec. 27, 2008, Intel’s profit plunged 90 percent from a year earlier, falling short of Wall Street estimates.
Intel’s layoffs and plant closures follow even larger restructuring at AMD. The chip-maker said in the fall it would spin off its chip-making facilities and focus on chip design. On Monday, AMD announced it would cut 1,100 jobs, or 9 percent of its workforce.
Both layoff announcements follow data last week that showed big trouble in the PC market. Shipments of PCs in the key fourth quarter fell 0.4 percent year-over-year, according to IDC. PC shipments in the U.S. actually fell 3.5 percent year-over-year in the fourth quarter.
Stingy consumers dragged dollar sales down even more. Q4 revenue fell up to 20 percent year-over-year , the worst drop-off since mid-2001, said Gartner.
Lao said the PC market downturn, while anticipated, was bigger than expected. “Even in the summer, sales were still ok. Then the floor started to drop out from under everything,” he said.
The newly-lean AMD is also posing a challenge to Intel the first time in awhile, said Lao, with PC makers showing interest in AMD’s low-priced notebook CPUs as well as its new high-end Phenom II CPUs. Even with its 40 percent cut to its Core 2 Quad Q9650 processor, Intel’s chips remain pricier than its Phenom II rivals.
Intel is responding. “I do not see this as a big ‘kill AMD’ move, although there is definitely a component in it,” Lao said. “Any time they can take a shot as a bonus, why not?”
As much as it might like, Intel won’t cut chip prices in order to stimulate the PC market, said Stephen Baker , an analyst with NPD Group. “It’s hard to see them [Intel] being any more aggressive on pricing, as it brings the specter of the government around,” Baker said.
Intel has been repeatedly investigated for alleged anti-competitive and monopolistic practices. It is currently appealing a long-running European Union anti-trust investigation.
Also, PC makers “don’t need any more product,” said Baker, who likens the weak demand for PCs to the real estate market, which is very slow despite the abundance of cheap foreclosed homes. “[PC makers] don’t want to hold [chip] inventory, nobody wants to hold inventory,” he said.
While consumers showed their preference for lower-priced PC models during Christmas, Baker doesn’t expect PC makers to respond by breaking any new ground.
“How much lower can you get than $299 for a desktop PC?” Baker said. “If you did, I’m not sure you could stoke a lot of incremental demand.”
Lao agrees that consumers are unlikely to see cheaper PCs. Intel’s most-recent price cuts will be eaten up by PC makers, wholesalers and retailers,which are all suffering due to weak sales volume, he said.
IDG News Service ‘s Elizabeth Montalbano contributed to this report.