Intel's AI Resurgence: Gelsinger's Vision and Strategic Partnerships

Intel's years of missteps leave it fighting for survival in the Nvidia-dominated AI era

Henry V had Agincourt. Gen. Robert E. Lee had Gettysburg. And Intel CEO Pat Gelsinger has Chandler. That would be Chandler, Ariz., outside Phoenix, where Intel is investing nearly $30 billion to build two state-of-the-art semiconductor plants, or fabs, that will be the first to use the company's newest chipmaking process. It's here, in Chandler, where Gelsinger's fate -- and likely that of the company he leads -- will be decided. Gelsinger, who was named CEO in 2021, has essentially bet the company on 18A, a new chipmaking process. He hopes it will position Intel as a viable alternative to Taiwan Semiconductor Manufacturing Co. (TSMC), the world's leading contract manufacturer of chips. The reason for Intel's struggles is clear: It fell victim to a classic innovator's dilemma -- not once but twice. First, early in the 21st century, its preoccupation with producing chips for PCs and data centers led it to miss the smartphone revolution. Then, in the past decade, it missed the emergence of chips designed for artificial intelligence. Intel rival Nvidia took a type of chip originally designed for the demands of video games, the graphics processing unit (or GPU), and turned it into the workhorse for training and running AI models. Now the generative-AI boom has made Nvidia one of the world's most valuable companies, worth more than $3 trillion, compared with Intel's relatively paltry $84 billion. Gelsinger is racing to reverse Intel's slide by repositioning the company around manufacturing excellence, while also trying to establish Intel as a player in the market for AI chips. Many are skeptical he can pull it off and fear the company may be in permanent decline. Intel wound up in such dire straits owing to missteps in its core business for central processing units (CPUs), in which it was once the unrivaled king. Production delays and problems in its own fab facilities have let rival AMD steal significant market share. Distracted while trying to fix these issues, Intel failed to see the extent to which graphics chips would come to dominate the market for AI. Instead, it thought AI would be run on systems that still had CPUs at their heart. "The strategy has been to fix the core business and don't worry about the ancillary stuff," says Alan Priestley, a Gartner vice president analyst. "GPUs were the ancillary stuff." Even after Intel belatedly recognized the fast-growing market for AI-specific chips, it bungled its efforts to get into the AI game. In 2019, it announced its own GPU design for AI called Ponte Vecchio. But the design was complicated, requiring three different fab processes to make, and expensive. Worse, its performance couldn't match that of Nvidia's chips. This year, Gelsinger shelved Ponte Vecchio in favor of a new design due in 2025. Intel also bought AI chip startups but struggled to turn their products into blockbusters. In 2016, it purchased Nervana for $350 million, but took years to roll out chips based on its technology. When it did, they had already been eclipsed by Nvidia. Then in 2019, it bought Israeli AI chip startup Habana Labs for $2 billion. Intel says Habana's chips beat Nvidia's. But these claims have not been independently verified, and Intel expects only $500 million in sales from Habana's latest chips this year, compared with Nvidia's tens of billions of dollars in revenue. Intel did not respond to a request to make Gelsinger or other executives available to comment for this article. But Gelsinger publicly acknowledges the impossibility of displacing Nvidia's dominance in chips for training large AI models anytime soon. "In that race, you know, [Nvidia] are so far ahead," the CEO said at a technology conference in August. Instead, Gelsinger thinks Intel can compete in the market for AI inference -- running AI models that have already been trained. He also says another new Intel chip will be a hit for use in laptops and PCs that run AI applications. But Intel's board has reportedly voiced concerns about Gelsinger's AI strategy not being aggressive enough to ensure Intel will play a significant role in what is now the fastest-growing market for chips. Gelsinger's immediate problem is that Intel is hemorrhaging cash. The 18A gamble is expensive. The company has committed $185 billion to build new fabs and upgrade existing ones. Meanwhile, costs for Intel's planned Arizona fabs and two more in Ohio have soared past initial projections. The Arizona plants, which Intel is counting on having online in 2025, have been hit by construction delays. And in September, Reuters reported that Broadcom, which makes networking and radio chips, had tested Intel's process and concluded it was not yet ready for full production. Amid this bad news, Intel's foundry business has notched a few precious wins: In September, Amazon's AWS agreed to manufacture a next-generation AI chip at Intel's 18A fabs. Intel previously struck a similar deal with Microsoft. Finding the money to pay for 18A, though, is rapidly becoming an existential crisis. Intel's annual sales have flagged -- down $24 billion, or 30%, since Gelsinger took over. In 2022, the company's free cash flow turned negative. It has worsened since then. As of late June, Intel was burning through $12.6 billion more cash than it was taking in on an annual basis. Investors have reacted to the cascade of troubles by punishing Intel's stock, driving its shares down almost 60% so far this year. To reassure Wall Street, Gelsinger has been forced into painful decisions. In August, he announced $10 billion in cost cutting that included laying off 15,000 employees -- 15% of Intel's workforce. He also reduced capital spending by $5 billion and suspended Intel's dividend. Then, in September, he announced more radical action: Intel's foundry business will be formally spun off as a separate subsidiary. The hope is that this will reassure potential foundry customers that their design secrets won't leak to Intel's product division and that Intel won't prioritize its own production needs over theirs. Critically, it will also let the foundry business raise capital from outside investors, possibly alleviating Intel's cash woes. Gelsinger also shelved plans for a new $32 billion fab in Germany, as well as new facilities in Poland. The company has turned to the U.S. government for help, too. Intel has been counting on money from the U.S. CHIPS Act, signed by President Biden to boost domestic chip production, to assist in paying for some of its new 18A fabs. In March it was awarded $8.5 billion in direct CHIPS funding and $11 billion in loans. But the money is tied to Intel hitting certain construction milestones, and it has yet to receive any funds. At some point Gelsinger may be forced to choose between preserving Intel's core chip-design division -- and selling off the foundry business entirely, an admission that his 18A strategy has failed. Whatever Intel ultimately does, drastic measures are likely necessary if Gelsinger still hopes to snatch victory from the jaws of defeat.

Why Intel Deserves a 'Pat' on the Back

"We succeeded then -- and we will meet this moment and build a stronger Intel for decades to come." Intel is all over the place, with Apollo considering a $5 billion investment to save them, while Qualcomm is eyeing an acquisition. But Intel needs no one -- under Pat Gelsinger's leadership, it's determined to remain independent and emerge stronger. "I think Intel will become a shadow of itself. It will go the way of Motorola and BlackBerry. Right now the vultures are coming for the carcass. Apollo has jumped in. They are a well-known distressed buyout shop. The Apollo team specialises in these asset plays. First, they will make a $5b direct investment. Maybe take 1-2 board seats, buy first rights to 2-3 core assets and begin the divestiture playbook," said Vijar Kohli co-founder of Golden Door. Intel seems to be at a crossroads, and nothing is going their way. Recent reports indicate that Qualcomm, having recently entered the PC processor market, is exploring a potential takeover of Intel, renowned for its CPUs and X86 architecture. However, the deal is described as "far from certain" and would likely face significant regulatory scrutiny. With Intel's acquisition, Qualcomm is possibly trying to strengthen its hold in the PC market and add Intel's Lunar Lake with x86 architecture in its portfolio. "The interests that Qualcomm might have in Intel would be strictly on the design side, on the chip designs for PCs. That's still a huge market. And just Intel and AMD are players there, and it's likely to remain the dominant form of technology for PC CPUs," said JoAnne Feeney, Advisors Capital Management portfolio manager. Surprisingly, when Microsoft recently announced its Copilot + AI PCs, it actively showed love for Qualcomm processors more than for Intel and AMD, as the capabilities of the current generation of both companies were not even close to what Qualcomm was offering. Meanwhile Intel chief Pat Gelsinger is trying its best to save the company. He even sent a memo to his employees in which he said that, "There has been no shortage of rumors and speculation about the company." To compete with NVIDIA and capitalise on the generative AI wave, Intel began manufacturing GPUs, however, unlike NVIDIA, it has struggled to gain market share. According to a recent report, NVIDIA holds 88% of the GPU market share, while Intel is struggling with a minuscule share. Meanwhile, Intel is all set to launch the Gaudi 3 accelerator today, and it will be interesting to see how the market responds to it. Indian AI companies are among the primary customers of Intel GPUs, as they are comparatively more affordable than those from NVIDIA. Notable Indian customers of Intel include Ola, Krutrim, Zoho, Infosys and CtrlS. In 2025, the successor to Gaudi 3, Falcon Shores, will merge the AI capabilities of Gaudi with the powerful GPUs from Intel, all within a single package. Intel also plans to onboard another version of the AI accelerator superchip, Falcon Shores 2, by 2026, which will be based on the Gaudi 3 architecture. However, Intel could be shifting its focus away from GPUs this year. To turn around the fortunes of the company, Intel's chief urged the team to build on the momentum in the Foundry business as they approach the launch of Intel 18A. He also called for urgency in creating a more competitive cost structure, with the goal of reaching the $10 billion savings target outlined last month. Alongside these efforts, he stressed the importance of refocusing on Intel's core x86 business while advancing the company's AI strategy and simplifying the product portfolio to better meet the needs of customers and partners. Moreover, Intel recently announced a partnership with Amazon Web Services (AWS) that includes co-investing in custom chip designs. This collaboration features a multi-year, multi-billion-dollar framework covering products and wafers from Intel. As part of this agreement, Intel Foundry will create an AI fabric chip for AWS using the Intel 18A process. Intel will also produce a custom Xeon 6 chip on Intel 3, continuing its existing partnership that involves manufacturing Xeon Scalable processors for AWS. Looking ahead, Intel expects to have a strong collaboration with AWS on further designs across Intel 18A, Intel 18AP, and Intel 14A. Recently, Intel has been awarded up to $3B in direct funding under the CHIPS and Science Act for the U.S. government's Secure Enclave program. Moreover, Intel plans to create Intel Foundry as an independent subsidiary to strengthen its progress in the semiconductor market. Intel Think 'Outside' the Box It's high time for Intel to pivot from being just an AI PC processor company to providing inference solutions as well. Currently, alongside NVIDIA, companies like SambaNova, Cerebras, and Groq are preferred by customers for their ability to deliver exceptionally fast inference solutions. This may require a complete architectural change, which might initially seem difficult for Intel, but it is worth trying, otherwise, it risks becoming a sinking ship. Not to forget, Intel last year launched 5th Gen Xeon processors, featuring AI acceleration in every core. These processors provide greater performance to customers deploying AI capabilities across cloud, network, and edge use cases. Nokia is another good example for Intel which pivoted recently. The phone maker that once ruled the mobile market, "connecting people" for over two decades, is now planning to do the same with its networking solutions in the age of AI. Recently, Nokia CEO Pekka Lundmark highlighted the company's unique position in the global market, emphasising that Nokia is the only firm capable of delivering all key networking components outside of China. Only time will tell what destiny lies ahead for the company. History shows that the most successful companies are those that have effectively pivoted to meet changing demand.