Intel Adjusting Its Business Model

SANTA CLARA, Calif.—Intel CEO Paul Otellini is promising change when it comes to the company’s business model and concerns about how the chip giant will continue to make a profit with the slowing of the U.S. economy.

At the chip giant’s annual Investor Day conference, which kicked off at its main headquarters here March 5, Otellini told an audience of analysts and industry watchers that the company will adjust its business model in the coming months as its economic situation continues to change.

For Otellini, the first order of business is to fix the company’s NAND flash business. Earlier this week, Intel released a statement that announced it was adjusting its projected gross margins—an important indicator of profitability in the chip business—for the division from 56 percent to 54 percent, citing lower-than-expected prices for these memory chips.

The market for memory, including NAND and DRAM (dynamic RAM), has taken a hit lately thanks to oversupply.

How Otellini and the company’s management will fix the situation was unclear. But the CEO promised change is coming. Otellini also said the company will invest in more cutting-edge NAND-based technology, such as solid-state drives, to help the division.

“It is my personal commitment that this will not be a drag on Intel,” said Otellini. “We will either fix it or make it profitable.”

Other than the concerns about its NAND business, Otellini and other Intel executives were upbeat about the PC market despite a number of reports that the U.S. economy might continue to slow down during the next several months, which could cause IT departments to cut back on server and PC purchases. In addition, Intel’s last quarterly report disappointed Wall Street, and the company offered a cautious outlook for the next three months.

One reason why Intel remains upbeat is a chart that Sean Maloney, the executive vice president of sales and marketing, showed that breaks down the company’s PC business. Right now, the United States accounts for about 24 percent of Intel’s sales in this market. On the other hand, Western Europe accounts for 23 percent of its sales, while China accounts for about 14 percent, and Asia Pacific, excluding Japan, makes up about 13 percent.

Like Hewlett-Packard, which reported that about 70 percent of its sales come from outside the United States, Intel is hoping that by relying on sales from overseas, it can withstand a slowdown in the U.S. economy.

Intel is also working on streamlining its business and improving its profits by reducing its payroll. In 2006, when the company began looking to reduce its head count, Intel had about 105,000 employees throughout the world. Now, it has about 86,500, and that number could be reduced to 80,000 by year’s end after Intel spins off its NOR flash memory business.