Never a Good Thing for Government to Pick Winners
Andy Grove left Communism behind when he emigrated to the U.S. from his native Hungary. He joined Fairchild Semiconductor as an engineer, and when Gordon Moore co-founded Intel in 1961, Andy Grove was his first hire. Grove became Intel President in 1979 and President in 1987. During Grove’s tenure revenue grew from $1.9 billion to $26 billion, while Intel’s market capitalization grew by 4,500 percent.
The company was run by engineers, and in his book, “Only the Paranoid Survive,” Andy Grove spoke about there being a culture of “argument,” where bright engineers argued about all the technical aspects of development, design, production and marketing. He was convinced that this culture brought forward the best ideas and vetted them thoroughly.
Even when Intel was only marketing memory chips, the company wanted to be an integrated design manufacturer, in order to ensure consistent process and quality. As the company moved into building CPUs the rapidly growing personal computer market, Intel initially used some outsourcing, integrated manufacturing was always the preferred way to market. Intel formed an immensely profitable duopoly partnership with Microsoft by establishing the performance superiority of the Intel 486 and Pentium processors. PCs with the sticker “Intel Inside,” commanded a premium price of $50-100 per unit for the processors.
Fast forward th the story of the Intel board hiring long-term insider Pat Gelsinger twice to become CEO. The Wall Street Journal details how the executive and board management collectively destroyed $150 billion in shareholder value.
The Intel 10K for the year-ending 2024, clearly shows the complex situation facing the company due to its weak financial condition. The U.S. government decided, perhaps rightly, that the U.S. needs to have a global industry leading, integrated chip designer and manufacturer on our soil to be a secure source for chips of the future, which would be needed by both civilian and defense industries. The Chips and Science Act (“CHIPS ACT”) of 2022 authorized up to $280 billion in expenditures through government FY 2027(October). Some $53 billion of the spending will comprise grants, loans and tax credits to companies engaged in manufacturing, development and training to bolster the semiconductor industry. Companies like Intel, Taiwan Semiconductor Manufacturing Company (TSMC), Samsung and others have received allocations already, with INTC receiving $8 billion to build new or expansion fab facilities.
Ramping up the U.S. semiconductor industry to support innovative design, and integrated production of consumer and industrial processors, as well as data center chips will be severely hampered by skilled labor shortages. Missouri University Science and Technology Institute has projected that the industry will need 300,000 new engineers by 2030 to make up for retirements and expansion. Not every worker on the floor of a wafer fabrication plant need be an engineer, but wafer techs and process techs are critical to the throughput, but they too need specialized skills beyond a high school or liberal arts college education. Of course, other industries like medical technology, healthcare, government and software will be competing for people with this kind of training, aptitude and desire to learn. I believe Intel’s Ohio plant and some others will have on site “universities” or training facilities to develop their workers. A lot of marketing will be needed to build this workforce.
Intel is challenged because cash from operating activities was weak in 2024 at $8.3 billion, with adjusted cash flows being ($2.2) billion. Former CEO Gelsinger doubled down on Intel’s plan to build manufacturing capacity large enough to handle its presumed growing xPU, xGU and data center processor demand, and a dedicated manufacturing capacity for outside customers. This was a foolish goal, and it is no longer possible given the financial constraints on capital spending and expected weak cash flows.
The company speaks about potential acquisitions going forward. What kind of successful, entrepreneur-driven company would want to be acquired by Intel, which has a weak stock currency and needs cash for its core business? The company itself must be competing to keep its best engineers.
The disclosures also note that under the CHIPS Act, government money might be expensive money, i.e. it comes with strings. Ir Intel were to fall behind on its promises which went with the billions in grants and tax credits, there will be cash penalties or restructuring of ownership shares. The company is not considering any more grant applications for government funds.
There is a new CEO of Intel is Mr. Lip-Bu Tan, from Malaysia, where he was educated and has significant government and financial ties. Incidentally, Mr. Tan was on the Intel board for at least some period of Pat Gelsinger’s reign of destruction. The single fact which I find most disturbing that there isn’t a new, high-powered CFO to be Mr. Tan’s partner. The best performing companies in my decades of experience and observation have seen a partnership between an exuberant CEO, and a more conservative CFO who can speak about investment returns and all of the industry metrics in a way which represents the interests of prospective mutual fund shareholders and analysts. This CFO hire should be forthcoming in the near future if the board and management have any sense.
The Weekly Trump Cabinet Spotlight
I admit that I don’t get Robert F. Kennedy, Jr. at all. I was thinking back to Jay Bhattacharya, M.D., Ph.D. (Econ), who was slandered and preyed upon by social media trolls on behalf of the Biden regime for co-authoring the Great Barrington Declaration. He apparently is busy doing his job as head of the National Institutes of Health. They show press releases of recent staff research results, all on appropriate topics Grant applications are online for young researchers!
Mr. B., Say It Ain’t So!
I have the highest regard and respect for founder, philanthropist and former New York Mayor Michael Bloomberg. I had the pleasure of sitting at a table with him at a Hopkins alumni event. His tenure as Mayor was uneventful, but that may have been just wat the City needed at that time, as the pols learned that he didn’t want anything and therefore couldn’t be bought. His outgoing soda tax sounded sensible, but it was ultimately regressive and hurt the profit margins at diners and soda shops: it laid an egg, quietly.
However, Michael Bloomberg has apparently endorsed Andrew Cuomo for New York Mayor. The Department of Justice found reason to conclude that 13 women in the former three-term Governor’s office had been sexually harassed, though Cuomo claims he was never interviewed. Remember Elmhurst Hospital during CoVid? It’s an altogether disappointing endorsement Mr. Bloomberg.
NPR in Crisis. Democracy at Risk?
So I was told by the popup when I went looking for their most recent financial statement. On repeated tries, I only found their fiscal year 2023 statements, audited by BDO. $31 million in cash. and $478 million in investments. $181 million in “bonds.”Net assets of $511 million.
$237 million in revenue. $101 million in corporate sponsorships, $96 million in program fees from affiliates, and $27 million in cash donations.
$210 million in salaries, benefits and taxes. Without knowing what “taxes” refer to, I would say this is a robust SG&A spend. Fear not, democracy is safe.