Server makers struggle with Xeon chip shortage

Intel's chip shortage, a problem since last October, has extended to its high-end Xeon line for servers, Intel executives say.

SAN JOSE, Calif.--Intel's chip shortage, an ongoing problem since last October, has extended to its high-end Xeon line for servers, Intel executives said.

"The 700-MHz Cascade (chips) are in really tight supply," Mike Fister, general manager of Intel's enterprise platforms group, said in a news conference yesterday at the Intel Developer Forum. "Cascade" is Intel's name for the Xeon chip, a high-end version of the Pentium III used primarily in multiprocessor servers, generally the most powerful and expensive Intel-based computers.

Intel has two types of Xeons, some of them with a comparatively small 256 kilobytes of high-speed memory called "cache" and more expensive models with 1MB or 2MB that are used in multiprocessor servers. These latter chips, the most expensive CPUs Intel sells, run at 700 MHz, slower than the small-cache version.

The problem stems from the fact that demand for Intel chips is higher than the company's manufacturing capacity, Linley Group principal analyst Linley Gwennap said today. Intel must figure out how to allocate its capacity to minimize the inconvenience to its numerous customers, including computing giants such as IBM, Compaq Computer, Dell Computer and Hewlett-Packard.

"They've got a situation where they have to say, 'Who are we going to short this week?'" Gwennap said. The capacity problems aren't likely to be fixed until the first quarter of 2001, he added. "I think it's going to be tight through the rest of the year."

The shortage is a problem now because corporate buyers tend to purchase more expensive servers this time of year, said Piper Jaffray analyst Amir Ahari. "Particularly in the third and fourth quarters, there is greater demand for these type of products," he said.

"I'm watching the situation closely," he added, "but it's nothing that's going to make me hit the panic button."

Intel canceled an 800-MHz version of its large-cache Xeon chips in July, saying high-end customers who spend lots of time evaluating new systems don't like to see frequent CPU updates. Intel also released a 1-GHz version of the small-cache Xeon this week.

Unlike with desktop chips, which are similar except for clock speed, the large-cache Xeon chips are much larger and therefore require Intel to plan farther in advance to build Xeons, said ABN Amro analyst David Wu. He believes manufacturers are getting the Xeons they ordered but aren't getting extra supplies they want.

Fister said Intel's top priority is to fill orders based on customers' forecasts.

Goldman Sachs analyst Joe Moore said in a research note yesterday that Intel's capacity constraints "are still fairly severe." And Banc of America Securities' Richard Whittington said the pace at which computer makers have been able to build PCs has been "held back by Intel's production problems," specifically the transition to the 0.18-micron production line that allows faster chips.

Ahari said Intel's supply problem is good news for Sun Microsystems, a rival server maker that designs computers build around Sun UltraSparc chips manufactured by Texas Instruments. Sun, he said, can boast, "Hey, we make our own things. We control our own destiny."

News.com's Ian Fried and Joe Wilcox contributed to this report.

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