Intel Corporation Foundry Strategy Makes No Sense

By Markets Fool.com

In a prior piece, I looked at comments fromIntel CEO Brian Krzanich regarding foundry effortsat the company. In particular, Krzanich noted in a question-and-answer session that Intel would be willing to build chips for direct competitors in the mobile processor space. The rationale is that shareholders want the company to grab as much of the revenue and profit as possible in the mobile chip market.

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While that might make sense from a short-term profit-grabbing perspective, this viewpoint completely ignores the long-term implications of enabling competitors with better technology.

Mobile competitors are trying to push into core Intel markets
In the mobile chip market, there are two major merchant chip vendors that matter: Qualcommand MediaTek. These companies generate significant revenue and profit from selling applications processors, connectivity chips, and integrated solutions into the smartphone and tablet markets.

However, Qualcomm has already announced that it is designing products to enter the data center market to go head-to-head with Intel. I would not be surprised if MediaTek decided it wants to try its hand at the server market as well.

So, if Intel were to strike foundry deals with one (or both) of these players, would it restrictwhat parts it would be willing to build? In other words, would Intel be OK with building a Qualcomm Snapdragon for mobile but tell the company "no way" for a server part that leverages much of the same intellectual property?

Surely Intel would not put its premium Xeon processors, which generate hundreds of dollars per unit in revenue, at risk in order to grab what is likely to be tens of dollars per unit in foundry revenue?

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Remind me -- what is the point of competing in mobile?
Even if we assume Intel would not put its core profit engines at risk for some foundry revenue and would only build mobile parts for competitors, then investors need to seriously ask whether Intel should be investing heavily in its own mobile chips.

In fact, Intel used to tell investors that perhaps its greatest strength is that it is an integrated device manufacturer. In other words, it designs and builds its own chips. This, in theory, should give Intel a better cost structure as it does not need to pay the margins of an external foundry partner.

Is Intel essentially conceding defeat in the mobile market? Is it saying that it has such little confidence in its product development teams and mobile product pipeline that it needs to be open to building chips for competitors to keep its manufacturing plants full?

I think that it is, in fact, an "either-or"
In the question-and-answer session, Krzanich was asked whether Intel faced an "either-or" situation with respect to either building competitors' parts or focusing on its own internally designed parts.

Krzanich believes it is notan "either-or" situation, and the market is sufficiently large (and Intel market share sufficiently small) that the company can pursue both. However, I fundamentally disagree.

If Intel is enabling foundry customers with its crown-jewel manufacturing technology, then I think those customers -- which have far more experience designing competent mobile processors -- will ultimately obviate internally designed Intel parts.

Intel either needs to leverage its manufacturing technology to try to gain significant share against its competition, or it needs to ax its internal mobile efforts and dedicate its foundry efforts to servicing mobile customers.

The article Intel Corporation Foundry Strategy Makes No Sense originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool recommends Intel. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.