Intel delays Celerons because of manufacturing crunch

The Santa Clara, Calif.-based chipmaker has delayed the release of 633- and 667-MHz Celeron chips by approximately two months, according to industry sources close to the company.

The chips, designed for budget PCs, were slated to appear in computers beginning next week. Instead, they will emerge toward the end of June, along with a 700-MHz Celeron and a 933-MHz Pentium III.

An Intel spokesman would not comment on the Celerons' release date but said that they are slated to come out in the second quarter.

Rival Advanced Micro Devices may benefit from the delay. The Sunnyvale, Calif., company said that it has made several hundred thousand more Athlon processors than it has sold in the past two quarters. Because of the time frame for the surplus, many of these extra chips likely run at speeds between 550 MHz and 650 MHz.

Computer makers, tiring of Intel chip shortages that have lingered since last October, may well begin to adopt more Athlons. Most of the computer makers already have computers that can accommodate Athlon chips. Moreover, a review of chip prices among dealers indicates that Athlon chips in the 600-MHz range are only slightly more expensive than 600-MHz Celerons--when they can be found.

As a result, AMD may try to increase its market share through fire sale pricing. In the past, Intel often capitalized on AMD's inability to manufacture chips in adequate volumes through sudden, and steep, discounts.

Intel's shortfall results from manufacturing capacity issues the company addressed when it reported its quarterly earnings earlier this week. Intel underestimated PC demand when it prepared its manufacturing plans last year. Consequently, a processor shortage developed.

"We did not anticipate the level of demand for the first half, especially for microprocessors, chipsets and flash memory," Andy Bryant, Intel's chief financial officer, said earlier this week. "Supply will continue to be a challenge."

Supplies of Intel processors are expected to remain fairly tight until the second half of the year, the company said. To ameliorate the problem, Intel is raising its capital spending this year to $6 billion from $5 billion.

Intel has been struggling with supply issues for about seven months. Last fall, the company had to deal with a shortage of high-end Pentium IIIs, a problem that is not completely solved. A number of chip dealers have stated that it is extremely difficult to find Pentium IIIs running at 800 or 850 MHz and 1 GHz. The delays have been exacerbated by growing demand.

Postponing the release of the two Celerons makes sense from both a financial and a manufacturing point of view. The least-expensive Intel processors, Celerons for desktops, carry lower profit margins than Pentium III chips, Xeon processors for servers, or even Celeron chips for notebooks. Allocating manufacturing capacity to these other processors will allow Intel to maximize its profit opportunities.

Paul Otellini, general manager of the Intel Architecture Business Group, which is responsible for making chips, said earlier this week that notebook chips and upcoming Xeons will not be affected by the manufacturing issues.

From a manufacturing point of view, delaying these Celerons will allow Intel to more efficiently use its current capacity. Like the Pentium III, The 667-MHz and 633-MHz Celerons will be made on the 0.18-micron manufacturing process, according to Linley Gwennap, principal at the Linley Group.

However, Intel's current problems stem from the fact that the company doesn't have enough production lines with the ability to make 0.18-micron chips. (The number refers to the thickness of the wires and other elements incorporated into the processor.)

Celerons running at 533 MHz and below are made on the 0.25-micron process, Gwennap noted. "They have plans to build (0.18-micron) capacity this year," he said.

In addition, Celeron chips often take more time to get to market than other Intel processors. Many Pentium III processors come in computers that are built to order. The chips therefore start appearing in computers within a week or so after they emerge from Intel's factories.

Celerons, by contrast, frequently are incorporated in PCs that manufacturers produce by the hundreds before shipment to retailers. These PCs, and hence their processors, can sit in warehouses for longer periods of time.