Inside Business

November 21, 2012 9:53 pm

Otellini’s exit is seismic issue for Intel

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Company must pick next chief executive with care

When your company has been built around a deeply ingrained product development and manufacturing process, it is hard to change. And when that process has given you a world-beating edge through any number of product and technology cycles, it is even less easy to see why you should.

Now add in another complication: Wall Street thinks you have traded away your future and you need to learn a whole new way of doing business. But there is a catch. It does not want you to give up the unrepeatable profit margins you make from your old ways.

That is the position that Intel finds itself in as it faces the conundrum presented by the early retirement of chief executive Paul Otellini. In the orderly world of Intel, where everything, including management succession, runs on rails, Mr Otellini’s somewhat disorderly departure – three years before his normal retirement date and without a designated successor – is nothing short of seismic.

As protector of what might be called the Intel Way, Mr Otellini has done his illustrious predecessors proud during his eight years at the top. The Intel machine is running on all cylinders, doing what it always did best, pushing the limits of silicon technology to produce ever-smaller transistors, while fine-tuning a gargantuan manufacturing machine to give the company a lead of some 12 to 18 months.

Mr Otellini has also made some big gambles to give Intel a stake in the future – not always successfully. Buying antivirus company MacAfee has given Intel deep security software expertise and might well look smart in the long term. But throwing the company’s whole weight behind WiMax – an attempt to own a part of the mobile future that could then be embedded in Intel silicon – flopped.

Also, his effort to breathe life back into the venerable PC notebook by reinventing it as a more sexy Ultrabook has failed when it comes to one of the PC industry’s most worrying problems: many buyers no longer see the need to upgrade.

Most importantly, none of Mr Otellini’s bets has given Intel a way out of its PC bind. Tied to a shrinking industry it is stuck on a dead-end road, albeit a highly profitable one.

The optimistic case holds that, in one chip cycle or the next, Intel’s unstoppable drive to smaller and cheaper will carry all before it. According to this view, the mobile market, which has balked at the prices and the high power consumption of its products, will inevitably succumb.

Those hopes were high a year-and-a-half ago, as Intel moved inexorably forward to its next shrink, pushing transistor sizes down to 22 nanometres and introducing a more efficient chip architecture. But it is still largely shut out of smartphones and tablets: the competition has hardly stood still either, and Intel is yet to come up with a performance advantage big enough to shake up a market that has already placed its bet on the rival ARM architecture.

So what can Mr Otellini’s successor hope to do better? If Intel’s board picks an insider, it will almost guarantee more of the same.

In a company that had always been run by eminent engineers, Mr Otellini himself represented a break from the past: he was above all a businessman with a strong marketing and sales background, someone who could match the output of Intel’s development and manufacturing process to the emerging markets in mobile and embedded devices. No other executive in Intel’s inbred management suite has the obvious skills to do better.

For a company where deep investment in culture and process have been essential to keeping the machine running smoothly, appointing an outsider would be a risk. But it might make it easier to challenge some long-held Intel beliefs. Two questions in particular would loom large if Intel breaks with the past and looks outside.

One is whether the company should itself adopt the ARM architecture for mobile devices. Playing the game devised by its competitors would make it difficult to maintain its differentiation, but Intel’s vertically integrated model might still give it some advantage. Gross profit margins would be hit. But that is looking an increasingly likely outcome in the PC world, whichever path is followed.

Another option for Intel would be to offer its world-beating manufacturing as a service to the rest of the industry, in effect becoming a hired hand. This would start to pick apart the company’s Intel model and might look like surrendering a key competitive advantage. But as the old PC world is left behind, it looks like the time has come to consider radical alternatives.

Richard Waters is the Financial Times’s West Coast managing editor

richard.waters@ft.com

www.ft.com/insidebusiness

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