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Inside Wall Street Two Arrows

Intel: The Strong Get Stronger
by WealthEffect Staff

At no time has Intel's position in the semiconductor industry been stronger. While its major competitors, Advanced Micro Devices (AMD) and Cyrix, are hemorrhaging, Intel is recording record profits and free cash flow.

The events of the last few months have reinforced the advantages enjoyed by the dominant player in any industry with significant barriers to entry. In the semiconductor industry, those barriers are enormous — to compete, a company must have a serious bankroll; building a single fabrication plant can be a multi-billion-dollar affair.

The economies of scale in this high-fixed cost industry are also significant. Intel is able to produce its integrated circuits (ICs) at a lower average cost than its competitors and, because of its reputation, Intel can charge more for comparable ICs — essentially, the company can get more for products which cost less.

In such an environment, Intel was able to report billions in earnings for the June 1999 quarter while #2 AMD announced hundreds of millions in losses for the same three months. (Meanwhile, #3 Cyrix was recently sold for the second time in as many years, and at a huge capital loss.)

The dominance of Intel is even more striking when you consider that this company was launched only two years before AMD, three decades ago. For its first fifteen years, Intel's core product was the memory chip, known as dynamic random access memory or DRAM. In the mid-1980s, fierce competition from overseas producers and a severe, and unexpected, downturn in demand drove Intel into the red — and almost off the map.

From this grim position, the company staged a remarkable turnaround, reducing its dependence on memory chips and focusing more heavily on ICs, the brains of the computer. The x86 architecture which it pioneered, although not the most elegant design, nevertheless became the standard.

The driving force behind this turnaround — in fact, behind the success of Intel over the decades- was Andy Grove, at various times its president, chief executive officer and chairman. If one of the better questions to ask when analyzing a company is whether you would want to compete against it, one of the better answers is that you would not want to compete against this guy. No one has lived that reality more directly than Jerry Sanders, the founder and chairman of AMD — while his company's stock price is about the same as ten years ago, Intel's has risen thirty-fold!

Intel's current position doesn't guarantee its dominance into the distant future, however. Perhaps the retirement of Andy Grove will in time soften the edge which helped build this company. Perhaps AMD's IC business will be sold to IBM and the resulting dogfight could lead to profitless prosperity for both. Perhaps the newly invented "atomic" semiconductor chip will one day reconfigure the economics of this industry. Perhaps the greatest risk is just around the next corner — after all, this is technology.

For now, however — and for the foreseeable future — we should recognize the achievements of Andy Grove and the company which he never founded but almost always led.


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