Now Gelsinger is gone, what is Intel’s Plan B?

Feature articles | December 2, 2024

By Peter Clarke

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What is Intel going to do next? Do key decisions have to wait while the company finds a CEO to replace Pat Gelsinger, and where will it find a buyer for Intel Foundry if that is what investors are demanding?

Has Gelsinger been sacrificed to the share-price gods? Is he just an unlucky general that will be replaced by another general that will execute on the same plan? Or will the next CEO immediately get out of manufacturing thereby destroying value, cutting jobs and wrecking US government policy?

The share price of troubled chip giant Intel jumped on Monday morning – up about 5 percent to US$25 a share – on the abrupt news of the “retirement” of Intel’s CEO Pat Gelsinger. But without any clearly expressed idea of what is going to happen next, both in terms of Intel’s leadership and the company’s operational structure, it is likely that the share price will quickly resume its decline.

The question is whether Intel can become a foundry and at the same time make processor chips that customers want to buy. Only a few days ago Gelsinger was talking the talk in praise of Intel chips for AI personal computers but also said: “We want to be a western foundry, at scale.”

The problem is that Gelsinger has been talking the talk for three years but has been unable to walk the walk to the stock market’s satisfaction.

White knight

Gelsinger arrived in 2021 as a white knight to save the ailing Intel. He has now resigned as CEO and is leaving the Intel board of directors so he is completely out, gone, history.

Only a few days ago Gelsinger was talking about all the things to be done in 2025 and defiantly pushing at the Department of Commerce to hurry up and give him the money promised under the US CHIPS Act – about US$8.5 billion on top of US$3.0 billion from the Department of Defense. This money is said to be essential for bringing up Intel’s Ohio wafer fab and ramping its 18A chip manufacturing process in 2H25.

In the end the subsidy was trimmed by the Department of Commerce to US$7.86 billion but it is interesting to note that the announcement of Gelsinger’s “retirement” was made after the CHIPS Act funding confirmation. If the announcement of Gelsinger’s departure had been made any earlier it might have given the Department of Commerce reason to pause and consider whether it would be sending tax payers’ money on a foolish errand.

Be that as it may, it appears that Gelsinger has been pushed out by a board and by disgruntled investors who considered that his turnaround of Intel was taking too long, or making no progress at all, and was horrendously damaging to the share price. Intel’s share price has fallen by about 50 percent during 2024 while most of the general stock market indices have all climbed by about 20 percent or more

Re-pitch

There have also been several months of disturbing rumours about Gelsinger having to re-pitch his plans for the company to the board. These include the disposal of such assets as Altera and proliferating equity-release schemes at various wafer fab sites around the world.

It was also notable that the much-respected semiconductor executive and investor Lip-Bu Tan resigned from Intel’s board of directors in mid-August. This was reportedly after differences of opinion with Gelsinger over the company’s revival plan.

Intel’s board of directors had asked Tan to take a look at the company’s manufacturing operations in October 2023. Reportedly Tan became frustrated with the bureaucratic culture, large workforce and the approach being taken to contract manufacturing. Tan’s departure from the board was disclosed shortly after Intel’s poor financial results in 2Q24 were announced, along with plans to cut 15,000 jobs or 15 percent of the workforce and slash capital expenditure including delays to overseas wafer fab projects.

More time

Subsequently, Gelsinger doubled down on his foundry strategy and had, it was supposed, persuaded the board that his plan to build up the “Intel Foundry” manufacturing unit before any potential sell-off deserved more time.

It is arguable that a forced ditching of Intel Foundry right now could destroy a lot of the remaining value that is locked up inside the operation. It could even effectively destroy the operation which is certainly not in line with the political aspirations of the United States. The US administration is clear that it wants there to be an indigenous US source of leading-edge chip manufacturing. TSMC’s presence in Arizona is welcome but is not secure enough given that all manufacturing processes are originally developed in Taiwan, a territory claimed by China. So right now Intel is US government’s only hope of getting close to secure leading-edge manufacturing.

However, Gelsinger has also said Intel’s manufacturing unit will be operated as a subsidiary company. That would make a spin-off easier and could bring such an outcome closer to realization. Unfortunately, the separation of the finances has also revealed what little progress Intel Foundry has made so far.

The third quarter did it

But it is probably the 3Q24 financial results that finally decided Gelsinger’s fate. I cannot remember when a company has ever declared a net loss of US$16.6 billion on sales revenue of US$13.3 billion. But that is what Intel did.

Now it is true that some of those losses were accounting write-downs against tax liabilities and loss of good will. But some were write-downs against forthcoming severance payments due to the big job cuts and also due to the amortisation of chipmaking equipment which never got fully utilized. There is also the financial strategy of getting all your bad news and liabilities out the way and clearing the decks so that thereafter growth can be seen to have resumed.

But Gelsinger was unable to tell investors that 4Q24 or even 2025 would be better. The detail of 3Q24 financial results did little but tell them there was hope for better times in 2026. Well 2026 is a long time off and investors want things now; either a rising share price or dividends or both. So, I believe it was with that entirely realistic forecast that Gelsinger’s fate was sealed.

So what next?

Does the board want to find a CEO that can push through the splitting off of Intel Foundry? The promise of US$10 billion of tax payers’ money to spend on wafer fabs might be an attraction for a buyer but in fact there are very few potential buyers out there. And regulatory concerns could tie a deal up in red-tape for years, a god-send for China. And so the only viable way forward might be to spin Intel Foundry off as an independent stand-alone company. But, apart from the US government, who would own and fund such a company?

And do investors’ understand that the consequence of any change of course taken ‘post-Gelsinger’ will still take two years to fully manifest and start driving the bottom line?

CFO David Zinsner and Intel Products CEO Michelle Johnston Holthaus have become joint interim CEOs. They will work alongside interim executive chair Frank Yeary. The board has formed search committee to look for a permanent successor to Gelsinger.

Will the Intel board be asking Lip-Bu Tan to return and take the CEO position, either as an interim step or for the longer term. Almost certainly and Tan might decline the opportunity so we may not get to hear of it.

Intel’s next CEO will have to be exceptionally good at managing massive change in a major company and also lucky in the timing of their appointment.

If Gelsinger has been on the right track with five nodes in four years (5N4Y), which is impossible to judge right now, and if Intel can start to regain market share with superior processors for AI-PCs and for other opportunities, then the right time to get appointed might be mid-to-late 2025, just in time to receive plaudits for a better 2026.