Intel plant delay may signal trouble

Citing disappointing flash memory sales, Intel said it will postpone opening a semiconductor plant in Texas, an announcement that may signal larger problems.

3 min read
Intel (INTC) said it will postpone opening a semiconductor plant in Fort Worth, Texas, by one year, an announcement that may signal larger problems for the chipmaking giant.

Intel will push back to 2000 opening a plant in Fort Worth that will make microprocessors because it estimates that demand for its flash memory chips will not require the full capacity of a Kiryat Gat, Israel, plant that's due to open in 1999. Originally designed to produce only flash memory chips, the Kiryat Gat plant is now scheduled to make both microprocessors and flash memory chips.

The decision confirms Intel is struggling in the flash memory market. It may also hint at trouble in its microprocessor operations.

"They may be using flash as an excuse [to hide that] they're not selling as many processors as they thought," said Dataquest analyst Bruce Bonner, who worked at Intel for five years before joining the market research firm.

Asserting that Intel has an excellent track record in anticipating demand, Bonner said, "The question is, why is it that they don't need that many processors?"

Reacting to the news, as well as to more-general turmoil in Asian markets, the Philadelphia Stock Exchange, a semiconductor index, declined 17.44 points, or 5.2 percent. The Nasdaq index, heavily weighted with tech issues, fell 20.33 points, or 1.2 percent.

"It's the Intel news, and with Asia on top of that, it was just a demolition," noted one technology trader.

In a third-quarter earnings report released last week, however, Intel trumpeted a company record for unit shipments of its microprocessors, up 19 percent for the three-month period ending in September.

Nonetheless, earnings were disappointing. Intel blamed its weaker-than-expected September quarter results on disappointing flash sales, but some analysts had suggested that disappointing microprocessor demand may have played more of a role.

Intel maintains it will go ahead with the Fort Worth plant, scheduled to produce high-end microprocessors. "It's not unlikely that many of the products that will be made [there] aren't even designed yet," predicted Intel spokesman Howard High.

High linked the Fort Worth postponement to increasing competition in the flash memory market. "[Conventional] memory makers are pushing into flash. There's lots of new players, and the supply base is larger than demand," High explained.

Total shipments in the global flash market are increasing, primarily because of growing demand for digital cellular phones, yet Intel's unit shipments are decreasing. Pricing is highly competitive--the cost of some flash memory chips has dropped by as much as 30 percent in 1997--but Dataquest estimates total industry revenues will increase slightly in 1997, growing to $2.9 billion.

"The market is robust--everybody's shipping more than ever before," Bonner noted. "Intel's shipping less than ever before does not bode well. It appears they're losing marketshare."

Intel held 33 percent of the flash memory market in 1996, followed by Advanced Micro Devices with 19 percent and Fujitsu with 13 percent. Sharp, considered the fourth major player, held only five percent but is thought to be coming on quickly, in part because of a joint venture with Intel in Japan.

Most of Intel's flash production is currently done at two Rio Rancho, New Mexico, plants, according to High.

Unlike conventional memory such as DRAM, flash memory retains data when a device is turned off. It's commonly used in personal electronic devices such as cell phones and digital cameras, but it's unlikely to replace either DRAM or the hard drive as storage technologies. Flash is much slower in accessing data and slightly more expensive than DRAM, and far more expensive than hard drives.

In an effort to maintain its leading position, Intel will push its StrataFlash product, High said. StrataFlash is a flash memory technology that stores two bits of information in each of the millions of data holders, or cells, comprising a memory chip. Flash had traditionally been limited to one bit per cell. Intel announced the product with great fanfare in early September.

An Intel spokesperson confirmed that StrataFlash is currently in sample production, and will begin volume production and shipping in the first quarter of 1998.

Intel is an investor in CNET: The Computer Network.

Reuters contributed to this report.