William Trent_

Intel's Continuing Folly: Capacity Expansion That's Too Fast For its Own Good

Jack,

It is fair enough to argue that Intel doesn't want to lose further share. However, <i>somebody</... is making too many processors and needs to stop. The auto makers bought the share loss argument for too long, and produced vehicles sold into fleets at little profit in order to avoid share loss. The same will happen in semiconductors unless supply and demand return to balance.

So Intel and AMD have a couple of options:
1) they can each produce an amount higher than end demand, hoping that the excess production gives them excess market share. If both companies continue to follow this strategy there will be little or no share shift, only excess supply (and lower prices) plaguing both of them.
2) only one can produce a higher amount than end demand, and gain share. Neither will allow the other to do this.
3) they can both reduce capacity growth to the level of end demand, in which case both can maintain their share and profitability. There could easily be fluctuations cack and forth as one or the other develops a superior generation of chips according to one metric or another.

It is a simple mathematical identity that <i>both</i>... companies cannot gain market share. Right now they are playing a game of chicken to see which one backs off first. While the consequences of being the one to chicken out may be embarassment and a small loss of market share, the consequences of neither chickening out are far worse.

Intel's Continuing Folly: Capacity Expansion That's Too Fast For its Own Good

The first link in the post helps describe the problem. Orders for semiconductor manufacturing equipment have been rising by 70% year/year, while end demand for semiconductors is in the high single digits. (Even this is above the 10-year average of 5.8%.)

If you wonder whether the industry is flooded, simply take a look at the inventory balances for Intel, AMD and their channel partners. The rapidly growing inventories tell you there are already too many chips. The 70% growth in semi equipment orders means there are going to be lots and lots more chips made in the very near future.

So there is the problem (which I have detailed extensively for months and was simply sparing those readers who have seen it before.) I also already gave the solution, which is to make fewer chips.

Intel's Continuing Folly: Capacity Expansion That's Too Fast For its Own Good

The negativity stems from the fact that adding capacity when there is an inventory glut is a stupid thing to do. I'm not so much interested in whether they advance technology as whether they can earn an adequate return on capital doing so. If the advanced astrophysics and environmental applications are willing to soak up the excess capacity then by all means I am for it. But since they aren't I think Intel should stop making so damn many processors.