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Intel plans massive cost cutting

Cost containment will rank in importance with product development and research, said chairman Andy Grove today.

Pushing the technological envelope is job one at Intel, but cutting costs isn't far behind.

Cost containment will become one of the primary objectives at Intel in 1999, and will rank in importance with product development and research, chairman Andy Grove and other Intel executives said today at its semiannual analysts meeting in San Francisco.

Company executives also said that smaller computer designs will proliferate in the market in 1999 as Asian manufacturers come to market with a raft of new computers at the Consumer Electronics Show in January. Notebooks, meanwhile, will see Pentium II chips running at more than 600-MHz in the second half. (see related story)

"We will increasingly put emphasis on the cost side," Grove told the assembled throng of four hundred financial analysts. As part of this effort, the company is also making an aggressive push to have more computer manufacturers, PC circuit board makers, and distributors conduct their purchases on-line, which cuts inventories and reduces transaction costs.

The focus on costs largely comes from the economics of the chip industry, said Andy Bryant, Intel's CFO. The average selling price on Intel's chips has stayed relatively flat for the past five quarters but expenses for labor, product materials, and plant investment have gone up. As a result, gross margins have declined by nine percentage points.

Intel has already cut back on administrative and discretionary costs, said Bryant. Intel also re-negotiated pricing for materials. "In the fourth quarter, costs will actually step down for the first time in a while," he said. Still, in 1999 the company will examine ways in which the structure of the business can change to eliminate further expense.

Among the cost cutting measures:

  • Intel will strive to reuse 70 percent of its chip making equipment for the succeeding generation. Re-use of equipment has already saved more than a billion, said Bryant.

  • Intel will move quicker between one generation of technology to the next, said CEO Craig Barrett. In other words, Intel will shift to the next-generation 0.18-micron manufacturing process quicker than it shifted to the current 0.25 process.

  • Packaging and other materials that go into chip making will be more heavily scrutinized.

  • On-line order management and purchasing will proliferate. Currently, the company has approximately 200 customers in 30 countries ordering products on-line. This will substantially expand in 1999

    The company will also try to raise its average selling prices by changing its chipsets and motherboards less frequently, said Pat Gelsinger, corporate vice president of the desktop products group. Chipsets are companion chips to the processor, while motherboards are the main PC circuit board.

    Currently, business users are fairly reluctant to upgrade their PCs because of the time and expense it takes to qualify and test these machines before buying. The testing procedure is complicated by the fact that Intel changes chipsets along with the chips. As a result, these business buyers buy the PC when it first comes out, and then continue to buy it for several quarters, after the manufacturer typically has discounted it several times and surpassed it with new machines. Likewise, the chip Intel sold initially will have been severely discounted.

    But, by keeping the motherboard and chipset the same across generations of chips, business users can feel safe in buying new lines of PCs. This will open up demand for cutting-edge chips because the qualification process will be shorter and less burdensome.