 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. As an American, you can't help but root for Intel CEO Pat Gelsinger to succeed. His vision to bring semiconductor manufacturing leadership back to the United States is, it's more than just a quaint nationalistic sentiment. Rather, it's a strategic imperative for the country, the country's military, its global competitiveness and access to future technological innovations in the AI era. But his strategy is dependent upon the success of Intel, both as a designer and a leading manufacturer of advanced chips. As such, this choice puts Intel in a multi-front war with highly capable leaders in both markets, including names like AMD, NVIDIA, AWS, Google, Microsoft, Apple, Tesla, and other chip designers, even now perhaps open AI. As well, they compete with established manufacturers like Taiwan Semiconductor and Samsung. Moreover, Intel's business model has been disrupted by ARM, which has created a volume standard powered by the iPhone and mobile technologies. And finally, China Inc looms as a long-term competitor, which further underscores the imperative. But the trillion dollar questions are, what are the odds that Intel strategy succeeds and are there more viable alternative strategies for both Intel and the United States? Hello and welcome to this week's the key research insights powered by ETR. In this breaking analysis, we try to address these uncertainties. And when we do so, to do so we welcome Ben Bahrain, who's the CEO and principal analyst at Creative Strategies. Ben, good to see you again. Thanks for coming on. Yeah, it's my pleasure. Thanks for having me on. All right, before we get into the discussion, I just want to take a quick look at the broad enterprise technology market. This ETR survey data, it comes from around a little over 1,700 IT decision makers. It plots net score or spending momentum of a platform on the vertical axis and its presence in the data, which is kind of a proxy for market penetration on the horizontal axis. And this market accounts for about 1.8 trillion of worldwide information technology, or your worldwide IT spend. If you think of the whole ICT market and you bring in telco, it's probably up around 4 trillion. So this is only a subset of the market. But nonetheless, the graphic shows that AI has become the sector with the most spending velocity since the announcement of ChatGPT. But the real point is AI is not going to be a distinct sector, we think. Rather, it's going to be embedded everywhere in every sector from IT hardware and software, AI PCs, mobile devices, consumer electronics, autos. Virtually every product is going to have AI. And that AI will be powered by silicon chips. So Ben, let's take a look at the state of the market and the key trends that are relevant here. The market has changed dramatically over the past two decades. You've got firms like AMD and IBM got out of the foundry business. ARM, we talked about capitalized in the smartphone revolution, completely disrupted the established business models. When PC volumes peaked in 2011, Intel's monopoly began to decline. TSM became the dominant manufacturer. Firms like Samsung rose up along the way with many others, including a spate of novel chip designers, like the ones that we mentioned before. So Ben, how would you describe the changes that have taken place in the market over the last decade or so? Yeah, I think you point to a couple of those key transitions. Obviously anybody who's focused on this industry and looked at it for a long time, recalls the day where Intel was really the leader in product design and foundry manufacturing process technology. Obviously, when we look back and we say, what happened to Intel over the course of the last decade, we look at things where they're elongating cycles of Moore's law. They didn't keep up with the same pace of Moore's law. They moved to, it wasn't TikTok. It was TikTok, TikTok, TikTok, TikTok. All of that driven by economics and foundry and their ability to keep their foundries full. In that timeframe, TSMC started becoming more predictable, more conservative as a leading edge foundry, meaning that they weren't trying to be too aggressive in their node jumps. And because of that, they were able to keep relatively straightforward node jump cycles and process development cycles, which became the best option for a lot of companies. Obviously, also during this time, Intel was not a really a third party manufacturer, which I'm sure we'll discuss, but they tried foundry. They didn't really try foundry like they're trying now. So they really weren't a great second source and you had scale, right? You had AMD, you had NVIDIA, you had Apple, you had Qualcomm, you had MediaTek, you had all of these companies shipping millions upon millions of chips every year, needing somewhere to manufacture that, needing to do so on a quality leading edge process. And that became TSMC. And through the course of that process, TSMC became the leader in process technology, which was once accorded to Intel, and now they are still that. Now, so that's the dynamic of this battle still comes back to who has the best process technology so that the environment, all of these to chip designers who want to make their products competitive on the best process will come to you. And that is by and large right now TSMC. Yeah, thank you for that. It's kind of actually embarrassing when you look back with hindsight, how COVID woke us all up to the digital reality and the notion that we rely on semiconductor technology for virtually everything. We were kind of asleep at the wheel there. And folks, they often talk about the global semiconductor supply chain. It includes companies in many geographic geographies, but as you know, Ben, it's really not a global supply chain. It's a supply chain that's highlighted by some very tenuous choke points. So this graphic depicts just some of those. And we've started in Taiwan, everyone knows we just talked about the TSM and the razor's edge that they're on with the Taiwan Strait and China. And Apple and its customers rely on TSM for those advanced chips. And as I say, China looms large. ASML is a Dutch company. It's the sole supplier of EUV lithography machines, which are required for making the most advanced chips. In these machines, they cost upwards of $100 million and they have like 400,000 parts. It's mind-boggling. And there are no alternatives to ASML for EUV machines. As you know, folks, Silicon Valley is the leader in EDA. And Japan is where you get most Silicon wafers. And other like thin film technologies from a pretty small number of specialized firms. And even China, which is currently enduring the no chips for you act, I call it, is where critical rare earth elements are found and really highly concentrated deposits, which make that country the leader in global supply. So these elements are critical in many phases of chip manufacturing. So Ben, how would you describe the current state of supply and semis? How do you think about these choke points and the challenges that they present to chip supply? I think it's one of the things that keeps everybody in this industry, especially those who make semiconductors up at night, because you do realize that there really isn't a central location where you can just have full autonomy and control of your silicon. You know, as much as we like to talk about this idea of nationalizing semiconductor manufacturing, no country will ever have 100% of the needs as given the graphic that you just said. It's a globally and tightly intertwined chain that I think people don't fully appreciate, which is why collaboration and being able to work together to have a smooth supply chain is necessary. And when that doesn't happen, things get really bad. We've seen this over the course of the last few years. So I think it's one of those things where you've really gotta pick how you manage your supply chain, whether it comes to leading edge or trailing edge, where you can try to minimize any risks because there's always gonna be risk, right? We're not gonna see alternatives to ASML like you talked about, where we may have foundry opportunities in terms of diversity, but there's still going to be a range of foundries that are located in different countries and the political tensions around those countries. So it's not going to change. Sort of my point, these choke points will remain. There might be a little bit more balance again as we get Intel competitive and Samsung as they continue to evolve in terms of foundry, but those core elements, the wafer supply, testing, like you said, EUV machines, we're not gonna make those somewhere else. So it still really is a global operation and any tensions in any of those environments can throw things off drastically. So something you said, I wanna land on for a second. So you said it's very unlikely that there's gonna be like a national supply chain. And so that applies obviously for the United States, but also applies for China. A lot of people are very much concerned about China taking over TSM, et cetera. But again, if I understand it correctly, your premise would be that it's unlikely that even China would be able to create a national semiconductor supply chain because it's gonna rely on EDA software from Silicon Valley, other components from Japan, et cetera. Is that a fair assertion? Correct, yeah. I think if you just look at everything that China's trying to do, where even today, they're using SMIC, which is sort of their largest manufacturer trying to do things in the leading edge, not able to get over the EUV hump they're having, they're trying to invent processes themselves. It's not going well. They still obviously need EUV machines and then there's political strengths on top of them that's making that challenging. Where do they get wafer supply? It's a very mature ecosystem, right? If you think about it, right? The semiconductor industry is one of the oldest, just in terms of technology, if you look back to the invention of the transistor and whatnot, and it is a very mature global supply chain. And it is intertwined for a reason based on where you get materials, who has those core expertise. And this is one of the reasons why it'll even be hard for any company to acquire or any country to acquire those assets, China included. So I don't have any belief that that changes. It appears that as much money as China wants to throw at this problem, it's not just a money. It is also a talent and it is an equipment problem. And does it look like really any company, any country is going to get over that hump? Well, we don't see anything changing, looking like that's going to change. And it's enormous market. I think I've seen estimates of half a trillion dollars growing to a trillion dollars. By the end of the decade, you may have better numbers than I even, Lisa Sue said, the AI chip market is 400 billion. So I don't even know if that may be additive to the numbers that I just shared, but I want to pivot to Intel strategy generally and its foundry strategy specifically. These are just a few of the relevant promises Intel has made. Its integrated device manufacturing 2.0 strategy is really designed to make manufacturing more competitive and efficient, both for internal and external customers. So they promised to save 10 billion by the time it exits 2025. The company used to have gross margins in the 60% plus range. As well below that today in the mid 40s, and it's promising to get back there eventually with a very aggressive 40% long-term operating margin goal. I mean, those are oracle-like operating margins. Intel is building out, and they don't really make much hardware, Intel is building out at least six new fabs that I could count. One in Ohio has been delayed, but its goal of having 50% of global manufacturing outside of Asia is what that is all about. And its objective is to return to process leadership and be the second largest foundry behind TSM by the end of the decade. So Ben Pat Gelsinger, he called Intel's first foray into foundry, he said it was a hobby, which I think was probably accurate. Why do you feel or do you feel this time around it's gonna be different? So I think it's important to look at like what happened the first time around that made this difficult? Intel said they would make chips for other people, but yet they still drastically prioritized Intel product technology. They didn't share that technology. They didn't share the leading edge with other people. And so you look back at just some of the customer stories of why that didn't go anywhere. And it was sort of obvious, right? It was like Pat said, it was a hobby, it was a very, very weak attempt. It was one of those things like, yeah, we'll say we'll do it, but at the end of the day, we're really not committed to a foundry effort. This is very different from a lot of different ways, not only that there is true division in the company in terms of what Intel product has access to and sort of the walls that are put off between Intel product technology and foundry, which is an important reason, right? Because if I am a competitor, let's say I'm AMD, I have no idea if AMD is ever gonna use Intel Foundry, but let's just use this for hypothetical. I would wanna be certain that my IP, my technology, my strategy, my roadmap is not being shared with Intel, right? Because this is an Intel Fab. So there is a walls that have to be developed that prior to this really nobody had any confidence was. It sounds like customers are certainly feeling that there is a process that Intel's put in place to keep kind of Intel products isolated from others is there. And then on top of that, there's a services part of this business, right? TSMC is at the end of the day, not just a manufacturer, but they are a services company, right? Their customer service is very good. They work with their customers. They're viewed as a partner. They go well beyond what's needed in order to deliver for those customers. So there's a services angle to it. So when we looked at Intel sort of doing this, those are the things we looked at, right? How separate is this entity? Is this truly a company that looks like it's functioning on its own even though Intel is essentially the funder of it, which is kind of the way I think about it. They are giving them capital, CapEx that they need, that they're not getting from either the revenue or from customers, right? Like TSMC does. So they're basically floating foundry in a broader level. But at the end of the day, are they just treated as a customer? And now that it looks like those walls are there and they are getting customers, a rumor came out this week that Nvidia's gonna use them for advanced packaging and some capacity. We know MediaTek's gonna deal with them. I think they now have five major customers for Intel Foundry. So it sounds like those customers are viewing this as a legitimate foundry effort. The wins that they're getting, some of the business that they're getting for capacity from TSMC makes it feel like this is very, very different. Again, they're not out of the woods. There's a lot of execution that has to come in in terms of their four nodes in five years, meaning that they need to execute on 20A and 18A and whatever's beyond that predictably for customers. And really it's that customer service point that I think has drastically changed. At least that's what we're hearing from people who are getting in and seeing the Intel toys for the first time. And broadly feedback has been pretty good in terms of impressiveness with the technology that's there. And that's again, I think this first time that truly Intel product is being treated like a customer instead of the priority that they were with Intel Foundry, this go around and that's absolutely essential for this to work this time around as well. You mentioned four nodes in five years. Earlier you alluded to the fact that TSM was much more cautious about pushing that technology. Why do you feel that Intel will be able to achieve that? I mean, Pat has been very vocal about, hey, people said we couldn't do it. TSM took the more conservative approach and that paid dividends. What's different about Intel than will it be able to tap those same benefits? I think part of the problem too that Intel had was they made some very bold density targets in their transition, while at the same time they hadn't fully embraced EUV, right? I think when you look at one of the major points that they backtracked on was the way that they embraced EUV for Foundry's. It was very mature. They tried something else. That didn't work. And as a part of what they tried, they also tried to be very aggressive in their density goals. None of that worked, right? Those are the two probably fundamental reasons that cost them process leadership. They've now embraced EUV and they're now bringing these technologies to in a more predictable fashion, backing off some of those density targets, even though it looks like they're relatively on par with TSMC. So those two things kind of changed this, right? I mean, a lot of this was, again, TSMC's playbook, which they're using. There is a difference though, coming with 20A and 18A that I think is really interesting because Intel's trying to do two things at the same time. And while it sounds big and difficult, it does sound like they're executing these two things, which is they're bringing backside power, which is a new innovation to manufacturing. Others will have it as well, TSMC, Samsung, et cetera, but they're bringing backside power to a node at the same time they're moving to a new transistor technology in ribbon fit, which is essentially nano sheets. So these two things, nano sheets, which is the broad industry term, which everyone will use and backside power, which is the same, are coming at the same time for Intel with products called ribbon fit, which is the transistor design and pen power via. Initially, like this was very concerning to me because they're trying to make a elite here and their track record, right? Hasn't exactly been stellar in some of these things. And so there was worry that this would cause some delays, right? That's kind of what everybody was looking for. All the investors that we talked to, customers in the market, they're like, we're just waiting for them to say it's delayed, right? 20a is delayed, 18a is delayed, whatever. And because of, we haven't seen indications of that. In fact, it sounds like they're taping out, customers are sampling on both of these things. The signs are good that both of those transitions are gonna happen at the same time, which is really impressive because TSMC is not jumping to both of those at the exact same time to the degree that Intel is. And it looks like Intel has pulled that off, which does put them in a competitive position. I'm not gonna say leading because we can debate what leading process technology looks like all day, but it puts them in a position to be in the conversation with a very quality process and two new innovations in transistor design and backside power that it does sound like are very, very attractive to customers. So it does look like they're on track. I think that's positive. Obviously a delay would be really bad at this point, but all of Gelsinger's commentary and what you're hearing from customers doesn't sound like that's gonna happen, that they are gonna meet 20A and 18A timelines, which to me feels positive. Ben, I want to make sure I understand this. Thank you for that, by the way. So my understanding is that TSMC started with EUV back as far as I think 2017. So they've got, let's call it a six year lead, but you're saying that ribbon set will potentially allow Intel to maybe not leapfrog, but catch up, close the gap. And if I understand it correctly, Intel is leading in that regard, whereas TSMC is perhaps being more conservative. Do I have that right? Yeah, in two points, right? So again, Intel calls this ribbon set. This is NanoSheet transistor design, which both Samsung and TSMC will have. Intel's getting there more aggressively first at scale. This is for whatever process it technically equates to, which is roughly like two nanometer, or maybe it's just sub two nanometer, and backside power, right? So backside power is the, which Intel calls power via, it's the new power delivery mechanism to transistors. It's again, it's a really big leap for the first time that we're gonna see this type of design. So we've got a big leap in transistor design, right? If you go back to Intel's TikTok days, right? TikTok was a kind of big transistor shift forward or redesign, this is the first one in probably a decade in terms of significance. While simultaneously adding a new power delivery mechanism in power via, again, it's felt really ambitious, but they are right there in terms of delivering at the leading edge. And I've talked to a lot of folks in the industry who actually think power via, so their backside power technology, which is very different than the way that Samsung and TSMC is gonna implement it, is actually extremely innovative. And there's a lot of people believing that that will reward them some very good benefits competitively from a process standpoint compared to others. And do you feel that whatever, six or seven year delay in adopting EUV is such that the ribbon-fet and the backside power approach that they're taking will allow them to close the gap, even though it sounds like, well, TSM and Samsung are maybe taking a different approach, they are gonna be using similar technologies, probably in a more compressed timeframe, but do you feel like based on what you know that Intel's approach, despite that six or seven year lag, will allow them to, maybe not leapfrog, but close that gap? Yes, I do. I do think, and I think that their commentary as well as what you hear from the industry and even the fact that TSMC's chairman, I think two orders ago on an earnings call even addressed this saying, that they're not worried, they think they'll still have process leadership again. That's a huge debate, like what is process leadership mean? The bottom line is they are going to be right there at a note around two nanometers with a brand new transistor design in ribbon-fet and an entirely new way to deliver power to the transistor via backside power. So whether they're in the lead or not, that's sort of irrelevant to me. I don't think this whole, like I need to be in the lead to win customers, but I think it needs to be a quality process technology that's competitive and a viable alternative. That's more of what I focused on. And from everything we're hearing and we're seeing, it sounds like they will be there for sure with 18A in the 2025 timeframe, probably scaling in 2026. So I would say, so let's kind of try to define a little bit, at least frame what we mean by leading, and I agree with you, you can get into these silly debates about what is what, but you said quality, it's competitive, it's a viable alternative, I would add, it's gotta be profitable and it's gotta be done at volume. Would you agree with that? If they can get to those characteristics, can we agree that that would be considered leadership? Yeah, I agree. And again, your volume point comes back to, they need a customer other than Intel, right? They're not going to become the second largest foundry by revenue, which is the point that Pat's makes, right? He's not necessarily saying second foundry by volume, but by revenue, so that's an ASP call. So again, making high margin chips, like NVIDIAs, server chips, right? For example, advanced packaging and chiplets, very, very high margin designs. You don't need the same scale, you're gonna get higher dollar amounts, content dollars or dollars in production, but they need more than one customer. They need two, they need three, wafer scale customers, which is the term that we use, somebody who consumes a lot of wafers in order to make sure that that factory, that foundry that they're spending now, right? 30, 40, sometimes people are talking about $50 billion of foundry, which, you know, back in the day, right, when we were all doing this in the 2000s, a foundry was $10 billion, right? Now it's, you know, 30, 40, 50. That's a tremendous amount of money that you need to capitalize and make money on in terms of how you fill that in capacity. So it's all those things, right? Waferscale, high ASP dollars, advanced packaging, which is the chip that technology comes into that, but they need a series of those wafer scale customers come into play and they need to be competitive, right? The process needs to be competitive and it needs to be something that a company believes they can build on and compete with other players who aren't building on that, right? Who might be building on TSMC, for example. So if all of that happened, it's a very positive story for Intel, because at the end of the day, right? If Intel pulls this off, Intel foundry will be more valuable in terms of revenue than Intel product, right? That's the end goal here. Like that has to happen as a part of this economically. But all of those things have to happen. Waferscale customers, quality process and technology, and again, customer service and predictability, right? They cannot have delays. TSMC doesn't have delays. They can't have delays. So all of that execution has to play in their favor for this turn around, foundry turnaround, which is tied to the Intel turnaround to take place over the next 10 years. That's a good lead in to what I want to do next, which is take a financial snapshot of selected chip designers and manufacturers compared to Intel. So this really underscores the multi-front war that we talked about earlier and just a caution. These are rough estimates. It's not precise. It's not made to be an investment vehicle. But what we try to do in these things, and we pull data from trailing 12 month revenue. We do revenue multiples off of that. The point is really to try to get a better understanding of the business model and the framework and the quality of the business. So that does tell that story. So you look at Intel, it's revenue growth. It's been stagnant, although it is promising improvement. Its gross margins, as I said earlier, have been decimated along with its operating margin. Its balance sheet is really not large enough to fund all those fabs. So it's got to do so with free cash flow out of its product business. But the free cash flow margin is really tanked as well. And so all of that has crushed the company's valuation. Intel was worth around a half a trillion in 2000 and along with Cisco was one of the most valuable companies in the world. It's now trading at a revenue multiple that is in the low single digits. So if you start in the light blue, there are two manufacturers we're showing, TSM and Global Foundries. TSM is the leader, as you can see, by its financials relevant to GFS. Samsung is another large player, but it's a giant conglomerate, so we can't really compare it and break it out. But TSM is of comparable size to Intel, a little bit bigger, and it's worth almost four times Intel. Global Foundries was formed by taking AMD's manufacturing operation and later it basically got given the IBM Microelectronics Division. It had to deal with IBM to manufacture 10 and I think seven nanometer technologies, but it had it back out, my understanding is it was just too hard and too capital intensive. And so IBM sued the company and that was kind of ugly, but Global Foundries at least was able to survive. Ben, how do you see Intel Foundry services stacking up today? We talked about that quite a bit. Relative to these two and Samsung, they have their sites set on 10 billion, maybe gonna do a couple billion in 2024, but my question really to add on the conversation earlier is around the learning curve. You know, Andy Jassy has this comment that there's no compression algorithm for experience. The learning curve for Intel is obviously steep. So how do you see them effectively competing in Foundry add to what you said earlier and I'm specifically interested in that sort of compression algorithm and the learning curve and your knowledge of what's required to really get on that curve in this space. Yeah, so I still think TSMC is probably the best comparable to use in an analysis. I mean, Global Foundries is there, but for the most part, as you pointed out, they compete at the trailing edge, right? So they're at stuff north of 10, 14 nanometer and beyond, right? So that's microcontrollers, that's a range of products, but they're not competing at the leading edge, right? Everybody who makes products today, like you said, Apple, Tesla, Nvidia, AMD, Qualcomm, MediaTek, you know, et cetera, right? Even the custom stuff going on at Amazon and Microsoft, like they wanna be on the leading edge, right? They may not get to the leading edge because there isn't capacity and somebody named Apple generally absorbs the vast majority of that first generation leading edge capacity, but they all wanna be there, right? So the competition is really for the leading edge. And interestingly, you know, when we looked at this from Intel for the past two years, our whole thought process is, well, they're just gonna focus really on the leading edge. And then recently, they just did a deal where they're actually leveraging a 12 nanometer process technology with UMC and they're doing that as a collaboration for a custom process, which is actually a really big deal and they're going to use their depreciated assets as a part of that, which is a very TSMC thing, right? To do is to take leading fabs that are already depreciated and you're making money on, you're just printing money on and you keep those full. Didn't think Intel was gonna do this and now they did, right? So just an interesting creative development where, you know, they're leveraging an asset, they're taking this book out of TSMC and they're making money from depreciated assets, which is very smart. This is a couple of years away from being into implementation but that deal's done super, super interesting. But at the leading edge, right, this is the part to me that's the most interesting because there is no capacity. Like you talk to everybody out there and we are up against the absolute limits of supply. We are a entirely supply constraint at the moment at the leading edge. And for whatever reason, you know, I've heard different things about Samsung. Samsung doesn't seem to be what many consider a viable alternative. We don't hear NVIDIA, we don't hear Qualcomm, we don't hear, you know, MediaTag, we don't hear these companies looking to Samsung at the leading edge. So when I say leading edge, I mean something three nanometer, which is what we're at today and beyond, right? So moving to two nanometer, 1.5, wherever that goes. They're really not considering Samsung. I don't know if that's a process thing. I don't know if it's a commitment thing, capacity, whatever the issue is, you hear more about Intel being front and center, having customers come in the door or evaluating their manufacturing process, evaluating their advanced packaging, and you're seeing them now get deals, right? There's a lot of customers, like I said, I think they have five at this point. We don't know who they are. We just know that they're big, they say their way for scale, like I said, NVIDIA has been rumored, but we don't have any of this terribly confirmed at the moment. The reality is they're getting customers near the leading edge. Samsung is not. So I say that because, again, when you unravel this back to the fact that we are supply constrained, the entire industry needs a second source. And if for whatever reason, that's not gonna be Samsung, Intel's in a really good position to take some of that and have some of that leading edge capacity that NVIDIA, AMD, Qualcomm, et cetera, cannot get access to with TSMC. So I think when you put it sort of in that broader perspective, it paints where they're at with this opportunity at the leading edge, but I throw in this 12-bound meter deal just to say it does look like they want IFS, right, Intel Foundry, is willing to be creative and leverage those depreciated assets in Foundry's to also make money to offset that capital burden as well, which I didn't think was gonna be the case probably a year or two ago. Interesting, I mean, you're right. I mean, hey, if Samsung doesn't aggressively compete, that opens the door for Intel as a viable second source. All right, I want to come back to that same chart and look at the green. These are a few of Intel's chip design rivals. They've got NVIDIA, AMD, and ARM, which really doesn't, they've licensed their architecture, which is why ARM has 100% nearly gross margin. But all three of these firms have, to me anyway, more attractive financial profiles than Intel currently has and they've far, far better multiples. Of course, ARM just popped this week when it blew away its numbers and raised. But the other thing is they don't have to fund factories. So Pat Gelsinger-Ben has said it now costs $30 billion to build an advanced chip-making facility. Can it throw off enough cash from its chip design division in client, in data center, et cetera, to fund its Foundry aspirations? You just mentioned sort of a clever move that they're making with depreciated assets. You know, the question is, is that enough? And at the same time, can they compete with the companies that we just showed in the blue, the chip designers? Yeah, so I think it's a good way to, again, understand what is essentially a separation right of Intel, right? I get this debate a lot, honestly, from folks on the street, right? That Intel should just split the company. The challenge there is, where would they get the money for Foundry, right? Someone has to give them that money. The government is contributing their, they have opened up and said, look, if anybody wants to co-invest in these Foundrys, we'll run them, we'll use our assets. We just need, we need more capital, right? Because this is a high fixed cost business. That's the single thing drawing down their margins is how expensive it is to keep funding these FADs, right? And they need to be full, right? They can't just be capacities. And Intel just did four nodes in five years. They need to amortize those smartly, but at the same time, they need to keep those factories full, right, with volume. So there's the Intel product, which I really less worried about, right? Because at the end of the day, Intel can make product at TSMC, right? Intel's going to be make, they do make some products at TSMC. They make some tiles for Meteor Lake right now as a part of their chip of design at TSMC for the next roadmap, Lunar Lake and others, they're making more tiles at TSMC. In fact, more than Meteor Lake. So they are actually a customer. And in some cases, they're becoming a large customer. So at the end of the day, Intel product can keep making there. That doesn't change our capacity problem. We'll still have a capacity issue with TSMC if Intel Foundry doesn't work where now we just got all these people really fighting for the leading edge. That would be a hot mess. But the reality is, from a Foundry standpoint, right, it's not like the turnaround is just not soon. Like this is the thing I keep trying to tell everybody, like the economics of this is a 10-year journey. Because if we're just going to start at maybe some degree 28, but really 18A, like 18A is the one that it sounds like most customers are interested in and beyond. So what's beyond 18A? That means that we are looking at the economics of them having to monetize those, make their money from that point forward versus that point backwards. So that high fixed cost business still remains intact until product can be there, until product can compete. I'm not too terribly worried about their designs. It really comes down to, is the process technology good enough to get enough people so that they keep those Foundries full going forward and those pay for themselves? I think it's going to be hard to monetize these last few despite what they're doing with UMC. They just don't do that the way TSMC does. So their margins essentially will still be on the rocks for the next few years. But that's to me the sign that includes this. If margins improve because of both product but also because of the revenue increase in Foundry, then that would be the sign that they're not just sinking all of this money into additional capex to fund Foundries that aren't turning a profit. And that's where I think the financial models for Foundry as itself become very clear. Intel's going to release this at the end of the month. To a degree, they're going to release this. They're going to talk more about this at the end of the month with their IFS day where they get very, very deep in the weeds around IFS strategy and what that's going to look like as a business. The financial model for IFS, so that will help. But it's really a go forward from here. Can margins improve? Can they monetize those Foundries? Most of what the last few factories have been probably won't see that same level of monetization, which is again why this is a much longer total financial value turnaround than a two to three year window. Yeah, I mean, the numbers are astounding me. Okay, so they're going to maybe squeeze $10 billion of efficiencies out of Foundry and internal efficiencies that pays for a third of a leading edge factory. And he saw Sam Altman just yesterday. It was an analysis of raising between five and seven trillion for semiconductor manufacturing. I mean, it seems like those are the types of numbers that we're going to need. But I want to revisit Wright's law. We talked a lot about volume. We all know Moore's law, but the lesser known Wright's law comes important in this discussion. So Theodore Wright, he was an aeronautical engineer that was famous for formulating this thing called Wright's law, otherwise known as the experience curve effect. It basically says for any manufacturer or any product, it's as the cumulative number of units produced doubles, the cost per unit goes down by some constant percentage, let's say 15% and just pull a number out. But that's probably pretty reasonable. Combine that with Moore's law and you get a duplicate of effect. And this is highly applicable to chip manufacturing because each new generation of technology initially costs more to build for a unit than the previous generation. So when you start manufacturing a new process node, you lose money. So Intel's monopoly was one when it beat risk. And our premise has always been that it did so because it became the PC standard and PCs were the volume king until early last decade around 2011. They peaked, notwithstanding, you know, a bump up in COVID. And today, arm-based designs have a volume advantage, probably 10x the wafer volume. So Ben, given that arm has that wafer volume advantage relative to x86, share your scenario as to how to write slaw plays in this game of semiconductor manufacturing and how does Intel, whose volumes are basically flat, you've kind of alluded to this but go right to the heart of it. How does it get to a point where it's not bleeding money trying to catch up to TSN? Yeah, the big one just goes back to, you know, the point I made about needing wafer scale customers, right? They need people who will consume thousands and thousands and thousands of wafer per month, right, in terms of production. As you pointed out, right, that used to be Intel when it was really the PC industry and Intel had 99-ish percent of volume in chip sales at high-end compute. It was easy for them to monetize that. They were their first best customer to use an Amazon term. At high margins and getting the leading-edge quality products, it was very easy for them to keep monetizing and move to each fab because they knew they could fill it with Intel chip capacity. That's the big sort of run here, right? Intel produces something shy of 300 million chips a year. Obviously, like I said, ASP is rising, so that helps, but you absolutely need wafer scale. And so that's where I think they've been very clear. In fact, and ARM has announced this several times on the last few earnings, they have pointed out that they have a deal with Intel. Intel is in a position to make ARM chips for anybody that wants it, right? You got Broadcom, you got Marvell, you got Tesla. I seriously doubt Apple will ever do it, but maybe if the government forces some degree of chip design for local products or government to be made in the US, maybe they have no choice, but they're very, very deep with TSMC. Nvidia, like I said, another one that's coming there, they need those high margin, those wafer scales and we know they have a deal with MediaTek on IoT. Maybe that could come to ARM chips, maybe that could come to Qualcomm, right? And I think Cristiano Amano said they're not opposed and they've been talking to Intel and exploring it and they're gonna pick the best process, right? That's the thing. So that's why it comes back to having a true competitive process, a predictable roadmap and a real customer services like mentality, which is the structure of IFS. And if they do that, they're in a position to get those wafer scale customers. As again, those wafer scale customers can't get access from TSMC. And I think Qualcomm and MediaTek are good ones. MediaTek is a Taiwanese company and I know they're very, very in fine with TSMC, but Qualcomm to me is a good example, right? Qualcomm has not always used TSMC, they've used Samsung before. They compete with Apple, and you probably argue that they're one of Apple's primary SSE competitors for the things you talked about, smartphones, obviously even moving into automotive, they wanna compete in PCs. They don't have access to anywhere near the leading edge that Apple does because of Apple's involvement with TSMC. So if anybody, in my opinion, could completely change this game and would be very interested if Intel, because it's gonna be Qualcomm. And that is a wafer scale customer and then some. And I think if they could get that business, that would drastically change foundry. And at the same time, meaning that Qualcomm and team have vetted that Intel process technology is competitive or even better than TSMC's leading edge, that even puts Qualcomm in a much better position to compete with Apple in ways that they can't right now because they're not gonna be on three nanometer, they're not gonna be on two nanometer to the same degree that Apple will for maybe two years behind, just in terms of how this runs out in customer priority for TSMC. So they could use that desperately. And if that all plays out, they're in a very, very much stronger position to compete and they're a wafer scale customer for Intel. So they're the one based on sort of your point, right? Which is where do they get scale? They're the big one. They're a wafer scale customer. They could be primed to work with Intel and even better compete in the market than they can today because of their limitations to the leading edge with TSMC. You know, to your earlier point, because they've separated church from state and to the extent that they can get that quality and the competitiveness become a viable alternative, get their costs down because of what you were saying about where maxed out on capacity, there's no reason why a Qualcomm, if those other conditions are met, you know, or I would think even, I don't know, would Apple, you know, potentially to hedge its bets, use Intel as a second source if it can get there? Why wouldn't it? Yeah, it would. And again, you know, we don't know what's gonna happen with Taiwan. I mean, that is a risk, right? If for whatever reason, we were cut off from Taiwan, from chip access, Intel is really the only option in my opinion because even Samsung who has some scale here, it's getting not the leading edge. And again, also not ready a U.S. company. So there is still some risk, but really Intel would be really your only option, right? So we kind of need them to get there. Again, it sounds like they'll get there from a capital standpoint, but even, you know, you mentioned what Sam Elton's trying to do, which I think is really interesting, also a super complex problem. He's gonna be at Intel's IFS day at the end of this month. So we'll see what he says. But Intel has been very vocal. They said, listen, if anyone wants to help fund these things, we will run them. We will use our manufacturer expertise. We will help put customer products in these. And if that's a semi-custom design, like they have all of the means to do this, they just need those customers. And again, the hinge point had been, they were really not a competitive foundry and their process was behind. As all of that shapes up, things look very, very interesting with all these dynamics we're talking about politically, the fact that you can't capacity from TSMC, that there are companies out there like OpenAI, even like Microsoft or others, who would love to be at the leading edge and can't, right? They just can't because Apple's there, AMD's there, Nvidia's there, right? At TSMC, you're just not gonna get leading edge wafers. They're desperate for these things. So if it's even competitive, like, and that's the thing like, I keep saying it doesn't even have to be, it just needs to be competitive. There are customers who desperately need that today. Yeah, and to your point about the risks of TSM and China. I mean, I found it ironic that Warren Buffett sold his TSM stock, but he kept his Apple stock. That seems like the risks are potentially similar. Okay, we got a wrap, but before we do, let's handicap some of the scenarios. I put out a LinkedIn poll this week asking ahead of our talk here, Ben, which the following outcomes was most likely. Intel leads the market. However we define leadership, I just let the respondent define leadership, and I think we did a pretty good job here of roughly framing it. That's number one, Intel, the second one was Intel, has to do a joint venture or sell the business, or three, Intel ends up a distant third. Three-fourths of the whopping my 50 respondents said the outcome wouldn't be leadership, which one could infer is Jack Welch's number one or number two position, but Ben, how would you respond to this poll? Would you say leadership, as we just defined it, would you say it basically failed? They got to shut it down or do a JV? How would you handicap those three? Alex, bring them back up just so we can have them review them one more time. Market shares ship JV or sell the business or distant third after TSM and Samsung, what would you say? Yeah, so I think again, market leadership as defined by what, right? I don't know if they need to be technologically leaders, they're not gonna be revenue leaders. I mean, I don't see a scenario where they're bigger than TSMC, right? TSMC is gonna pass 100 million in revenue coming up this year, most likely. Intel's not, right? How long would it take for Intel Foundry to be that big? Again, probably never unless something drastic happens. So in terms of revenue and or size, scale, probably not a comp with TSMC. The JD side one, again, they've explored this. Like I said, they are open to capital coming in and funding foundries with them to some degree. UMC is this as well, like they won't call it a JV but they've essentially done that. You could imagine that that could be a plan B scenario with again, the caveat that the government cannot allow Intel Foundry to fail. So I don't know how that works or what that means for our country or our taxes or our debt, but they cannot let this fail, right? It's just too important to the national security from a manufacturing standpoint. So somehow Foundry lives in some capacity. I do though, I do believe, right? And this conviction just again comes from a lots of things I've heard in the supply chain about Samsung's challenges. I do think that they will do what Pat said, which has become the second largest foundry by revenue. I don't think they'll pass the SMC, but I do think if you look at Intel's Foundry revenue roadmap over the next 10 years, that to me is an achievable goal and it's a reasonable goal. If they pass the SMC for some reason, great. I don't see that happening, but great. But having the goal of second foundry by revenue, which again, could mean $40 billion of Foundry, 50, right, ish give or take, that seems reasonable between an Intel product and way for scale customers at the leading edge. So I think that's where we'll end up. I don't know how long it's gonna take, but I think that's the most likely scenario. With again, like you said, worst case scenario, JVs and the government has to do something to make sure that Foundry doesn't fail because it's too important. Yeah, I would. So based on that answer, I would put you in the number one camp because I would consider, again, Jack Welch, you're number one or number two, that's leadership. So I think that would firmly place your answer in the number one category. Hopefully you're right. Last topic I'm gonna hit on is those manufacturing facilities that we showed earlier. I counted six, so that means well north of $100 billion to fund that. So that's why I'm gonna really, Sam Altman's number caught my attention. They're getting you money from the US government and the EU, but let's call that what, 20 billion. So they gotta pay for the other, whatever, 100 plus billion that it's gonna need. And so I just wanna, I wanna close there and just come back. I know I've asked this question before, but where does that cash come from? That additional cash, it's presumably gonna come from their free cash flow, right? Does that play into your scenario? Yeah, I mean, they can't fund it all by themselves. I mean, that's the reality, right? That would drastically hit their gross margins in a way that no one wants to see those gross margins decline. We know they're getting a chip ax money. We know another round of that's going to come. We know that they're getting prepayments from customers, whoever those are, again, I have no idea the sizes of that. They're going to need that collaborative effort of revenue in what they call, Dave's this or their CEO is called is their smart capital strategy. They're going to need to keep using that, right? Government abilities to redistribute cash. They just can't do it on their own. So knowing that it really comes down to who are those customers that will prepay because that's what they're taking. Who are those customers that'll continue to help fund? Who are those customers that like US UMC will put capital, co-capital into some of these environments and then what can they get from government agencies? All of that's gonna be necessary until this can really work itself out by itself, which again, I have to imagine that if they have a scenario where we do all of this right, we look at the cash flow, we look at the customers that way for scale, they should make money. The Intel wants to grow revenue, they want to be extremely profitable again, foundry is a key part of that. So they have to have models that work when all of this goes right. And those are the things where I think they'll look at those strategic partnerships and again, government capital, because like I said, the government's not going to let them fail, will continue to give them a good portion of any money that goes into it. And again, something creative, like you said, like what Sam is doing becomes an interesting option and you'll see other government, other sovereign funds realize this drastic capacity issue that we have, look for ways to solve it and realize that Intel's a pretty good bet in a good position to help solve some of those things going forward, but strategic capital is still necessary. And the other thought I've had is that the U.S. government, which is attacking the likes of Amazon, not so much Microsoft, but hey, they may be next and Facebook and certainly Apple, that maybe the government gets those companies in a headlock and says, look, we'll ease off a little bit, but you got to throw some money into the chip manufacturing way. Ben, we got to go, thank you so much. You've got a great type of knowledge and really appreciate you coming on the program. Anytime, I'm really glad to do it. It's good seeing you again, Dave. Yeah, good seeing you. Okay, that's it for now. I want to thank Alex Meyerson and Ken Schiffman on production and they run our podcast as well. Kristen Martin and Cheryl Knight helped get the word out on social media and our newsletters and Rob Hof is our editor-in-chief over at siliconangle.com. Remember, all these episodes are available as podcasts. Just search Breaking Analysis Podcasts wherever you listen. I publish each week on thecuberesearch.com and siliconangle.com. You want to get in touch, email me david.valante at siliconangle.com or DM me at dvalante. Comment on our LinkedIn posts and definitely check out etr.ai. They've got great survey data in the enterprise tech business. This is Dave Vellante for theCUBE Research Insights, powered by ETR. Thanks for watching everybody. We'll see you next time on Breaking Analysis.