Intel on alert against next iPhone-size miss

Howard H. Yu
Intel certainly wanted to dominate this emerging sector but the price Jobs was offering was below its forecasted cost and it misjudged the size of the iPhone market.
Howard H. Yu

I am easily a foot taller than Andy Grove. But whenever I was with him, I felt that he was the giant.”

That’s what the bestselling Harvard business professor, Clayton Christensen, wrote about the former Intel chief executive when he passed away in 2017. Christensen, who coined the term “disruptive technology,” said he would most miss Grove’s ability to understand how a complex organization works, and to wield it to Intel’s advantage.

It allowed Grove, who started at the company the day it was incorporated on July 18, 1968, to famously re-orient the business in the 1980s. Intel shifted away from memory chips for mainframe computers towards the microprocessor.

Propelled by a deal with IBM to put Intel processors into all its personal computers, the company came to provide Silicon Valley with one of its most essential technologies.

Even after five decades of dominance, no other company in the world can produce a better and faster microprocessor. In 1965, future co-founder Gordon Moore made a bold prediction about the exponential growth of computing power. He predicted that the number of microchip transistors etched into a fixed area of a computer microprocessor would double every two years — and so, therefore, would computing power.

It’s difficult for anyone to fathom the effects of exponential growth. But it is why a single iPhone today possesses many times more computing power than the entire spacecraft for the NASA Apollo moon mission of 1969.

And yet, the iPhone is also what Intel missed. Immediately after the company won Apple’s Mac business in 2005, Steve Jobs came asking for another chip for his smartphone. Intel certainly wanted to dominate this emerging sector but the price Jobs was offering was below its forecasted cost and it misjudged the size of the iPhone market.

Apple had no choice but to build its own chipsets by licensing technologies from ARM, a British-based company controlled by Japanese interests. If Apple and its iPhone had been the only competitors, Intel might have been able to gradually adapt. But Google came in soon after with Android, a free operating system that Samsung, Huawei and HTC all adopted. Qualcomm, Nvidia, and Texas Instruments, all licensed by ARM, became the phone makers’ go-to suppliers for energy-efficient, low-cost computing devices.

These American rivals are not trying to beat Intel. But an Intel microprocessor sells for around US$100 while ARM-based chips sell for around US$10, and often less than a dollar. That’s how ARM-based designs are now found in more than 95 percent of the world’s smartphones.

In other words, Intel failed to compete in smartphones against those who have far less resources.

Now the big question is whether Intel is repeating its previous mistake with iPhones — this time in driverless cars.

Last March it purchased Mobileye, an Israeli company that makes digital vision technology, for US$15.3 billion. It was a big bet in a sector that has huge potential: As autonomous driving takes off, vehicles are becoming computers on wheels. They will require more and more microchips and Intel hopes to dominate.

Except for one glitch. Everything Intel has done in the last 50 years is geared towards general purpose, high-end chipsets. Its integrated model means it absorbs an enormous amount of fixed cost, in research and design as well as manufacturing.

Competing vision

The only way to offset these burdens is to sell a high volume of devices at high margins. The result is that the company is obsessed with technological progress, but has a rigid business model which limits what it can and cannot do.

But what if autonomous driving doesn’t actually require the computing power Intel is counting on? This is the competing vision of Huawei. When I recently visited Shenzhen, executives from the Chinese telecom giant explained to me that much of the city’s infrastructure will be digitalized and that Huawei will saturate it with a 5G network.

This will drastically reduce any speed and latency problems for computers. It is a radical vision, but clearly a viable alternative. The implication is that a BMW or Toyota doesn’t need that many high-end chipsets after all. It’s smartphones all over again.

Christensen’s insight was that successful companies die not because of complacency to change. Kodak, Polaroid, Blockbuster and DEC all understood the shifting landscape.

But in each case, their business model and the demands of existing shareholders formed an intractable nexus that even the most courageous executives found impossible to navigate. Grove once said, “only the paranoid survive.” Maybe he was right.

Howard Yu is the LEGO professor of management and innovation at Switzerland’s IMD and is director of the advanced management program (AMP). Shanghai Daily condensed this article.

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