Why Intel Reorganization Is Important for IT Industry to Understand

eWEEK PERSPECTIVE: An organizational streamlining failed to detect a defect mode in Intel’s 7nm manufacturing process that resulted in yield degradation and added six more months to Intel’s already delayed 7nm product rollout. Leadership has been realigned.

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Reorganizations are a fact of life in business and can reflect any number of issues or events, including financial issues or concerns, decisions to refocus the business, and missteps in leadership or execution. But a fundamental reordering of core strategies and the departure of the executive responsible are far less common.

That’s exactly what happened this week at Intel when, in the wake of the less-than-happy news about 7nm manufacturing processes the company revealed during its recent earnings call, CEO Bob Swan announced the departure of Intel EVP Murthy Renduchintala and the separation of his Technology, Systems Architecture and Client Group (TSCG) into five individual teams.

Let’s consider why this happened and what it means for Intel, its customers and shareholders, and the IT industry.

The TSCG Backstory

It wouldn’t be a mistake to see this announcement as the conclusion of a story that began more than half a decade ago when Intel’s then-CEO, Brian Krzanich, led the decision to hire Renduchintala after his departure from Qualcomm and task him with modernizing Intel’s product development and production processes.

Renduchintala had served as EVP at Qualcomm Technologies Inc. and co-president at Qualcomm CDMA Technologies, and many considered him a likely candidate to replace the company’s longtime CEO, Dr. Paul E. Jacobs (son of Qualcomm’s co-founder, Irwin M. Jacobs). He left Qualcomm after its board of directors chose company President and COO Steve Mollenkopf for the position instead.

Renduchintala was named president of Intel’s Client and Internet of Things (IoT) Businesses and Systems Architecture Group, then became group president and Chief engineering officer in May 2017. In that position, he organized Intel’s R&D, manufacturing and operations, design engineering, architecture, software and graphics development and supply chain processes into TSCG. Many believed that Renduchintala was being groomed for a larger role, including succeeding Krzanich after his retirement.

Manufacturing Expertise Makes IT Innovation, or Not

Renduchintala’s experience in manufacturing and supply chain processes (which was similar to Krzanich’s background) made him a solid choice for Intel. However, that point underscores an issue about the company (and other IT component vendors) that tends to be overlooked; that despite their inherent complexities, making semiconductors and microprocessors is similar to making anything else. Success depends on efficiently managing development, design and manufacturing costs and effectively producing quality products.

Renduchintala’s TSCG strategy focused on the first part of this equation—integrating development, design and manufacturing processes allowed managers to quickly discover and address problems when they arose. Unfortunately, TSCG’s organizational streamlining failed to detect a defect mode in Intel’s 7nm manufacturing process that resulted in yield degradation and added six more months to Intel’s already delayed 7nm product rollout.

As Swan noted during last week’s earnings call, Intel now expects to see initial production shipments of its “first … 7nm product, a client CPU, in late 2022 or early 2023.” What Swan didn’t mention during the call is that, even if all goes well, Intel’s new 7nm chips will be arriving as much as a year after Advanced Micro Devices (AMD) begins delivering its 5nm Zen 4 processors.

This is obviously bad news, especially after Intel had spent half a decade revamping its development, design and manufacturing organization according to Renduchintala’s strategic vision. If anyone had to take the fall for the additional 7nm setbacks, Renduchintala was it.

Final Analysis

The larger question, of course, is whether Renduchintala’s departure and the revamp of TSCG will have any practical effect or if they are symbolic gestures meant to calm the company’s investors. Practically speaking, dividing TSCG into five teams that report to the CEO may improve internal communications and reduce the possibility of unpleasant surprises. But the groups will need to continue working closely together to successfully address current and future process challenges.

In addition, the executives named as team leaders are Intel veterans with deep experience in their respective fields. If the company were seeking a way to address fundamental technological or cultural issues, its leadership would have looked for outside inspiration, as it did in 2015 in hiring Renduchintala. In other words, Intel’s new “reorganization” is more about correcting specific shortcomings and improving executive oversight than embarking on another technological/cultural reinvention.

How about investors? Certainly, Intel shareholders appear to need some reassurance. Following its stellar Q2 2020 earnings announcement ($19.7 billion in revenues, up 20% YoY, and $1.19 in EPS, up 29% YoY), following a quarter when so many other companies were in COVID-19-related disarray, Intel’s shares took a 16% hit and have remained mostly unchanged despite the reorg announcement and Renduchintala’s departure.

Is that apparent pessimism justified? Consider the position of the chief competitor in Intel’s core client PC and data center markets: AMD.

At one level, comparing the two companies is like matching up a plucky light or welterweight contender against a longtime heavyweight champion. In AMD’s recent Q2 2020 earning call, its quarterly revenues and earnings per share were about a tenth of Intel’s, and its net income of $157 million was less than 3% of Intel’s net income of $5.7 billion.

But at the same time, AMD’s shares have been on a tear, more than doubling during the past year. Plus, it continues to notch numerous design wins and positive product reviews, leading to the substantial demand for laptop and desktop systems based on its Ryzen processors that helped drive its financial results. Despite the disparities in the size of their relative businesses, it is easy to understand why Intel considers AMD a significant threat, especially as the long-term strategies developed and executed by CEO Dr. Lisa Su and her leadership team continue to flower.

In his bestselling book on business management (Only the Paranoid Survive, Currency paperback), Intel co-founder Andrew Grove noted that “business success contains the seeds of its own destruction. … Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” Admitting failure, pivoting away from unfulfilled hopes, and practically addressing technical and business challenges are the steps that suggest that Intel is keeping Grove’s spirit and philosophy alive and well.

Barring additional setbacks or outright disasters, the company seems likely to weather its current 7nm problems, largely maintain its market position, and eventually reassure shareholders and analysts. If so, the reorganization Intel launched this week and Renduchintala’s departure will be remembered as the beginning of the process leading to those outcomes.

Charles King is a principal analyst at PUND-IT and a regular contributor to eWEEK.  © 2019 Pund-IT, Inc. All rights reserved.