Planning to take a chip out of recession
Intel President and CEO Paul S. Otellini speaks during his keynote address at the 2008 Oracle OpenWorld conference September 23, 2008 in San Francisco, Calif.
Who: Intel President and CEO Paul Otellini.
Education: Otellini earned a bachelor's degree in economics from the University of San Francisco and an MBA from the University of California, Berkeley.
What you may not know: Otellini sits on Google's board of directors.
Ryssdal: Paul Otellini, good to have you with us.
Otellini: Great to be here.
Ryssdal: Here we sit at the world's largest computer chip company in what is arguably a post-computer world. Where does this company go from here?
Otellini: Well, I have a hard time with your assertion first of all. It's not arguably a post-computer world, it is a world which is still in the Model T stage of computing.
Ryssdal: What does that mean?
Otellini: It means that we have not even scratched the surface of what computing can do for us.
Ryssdal: So what can Intel do for us in that vain?
Otellini: Well, as a company our job is to expand the possibilities for our product, to put computing into more and more devices, to lower the cost of it, to make it easier to use, to make it more accessible for people around the world independent of income levels, and to make it more fun.
Ryssdal: Do you have fun with your computers every day?
Otellini: Part of the day.
Ryssdal: The other part of the day, what are you doing? Worrying about selling them?
Otellini: No . . . Think about what you would do differently or how you would do your job or how you would do your life nowadays without the Internet? It's almost incomprehensible. This is something which in terms of its ubiquity is less than ten years old and yet it is a fundamental part of our life. If your computer broke tonight, would you wait for the recession to end to buy another one?
Ryssdal: It's interesting you mention that because obviously people aren't buying computers now, which is why you are seeing sales fall and orders to your companies and your factories are down.
Otellini: Well, they are still buying computers.
Ryssdal: Not as many as you'd like.
Otellini: They are buying at 30 percent less than they were at the peak of last year. But it's still . . . I could argue that they are at 70 percent of where they were. and part of that is replacement, part of that is people are finding new uses, and part of that is that first-time buyers in emerging markets, and part of it is new price points. With things like net books which allow more affordable means of entering the world of computing.
Ryssdal: So what are you going to do while consumers are waiting? How do you, as the guy who builds the insides of a lot of the worlds' computers, going to either make us want to buy more or change yourself to make it a more attractive product?
Otellini: Well, let me come back to that in a second but first of all one of the . . . perhaps the only beauty of being in an industry for 35 years is you've seen things before. And when I started in this industry in 1974, it was traditionally seen as a highly cyclical business; and in fact the cycles would come every two or three years. And I think we got spoiled because we saw cycles spreading apart. The last really big cycle we had was post Y2K and the Dot Com bubble bursting in 2001. This is a different kind of cycle, this is a global economic driven cycle, but one of the things that I spend a lot of time as CEO doing is telling my employees, many of whom are in their twenties that have never seen a cycle, the nature of a cycle: that things end, that things get better, that you go through things. And for a technology company, I believe it's essential that you continue to invest in these cycles because as cycles end, no one wants your old product, they want what's new and what's next.
Ryssdal: So what is new and next for Intel if you have to keep people buying through this recession?
Otellini: From our perspective, we'll invest in new generation of silicon technology, which we'll call 32 nanometers. A nanometer is the width of the smallest line you can build so 32 nanometers . . . we are now dealing with things that are 2 or 3 atoms wide in terms of how small the features of our chips are. We'll put that new technology on the ground. We are putting 7 billion dollars of our own money into it over the next 18 months to build new factories and upgrade tools and factories here in the United States. And that technology will be very good for us because first of all it lowers our costs, which allows us a little more head room in an environment like this. Second of all, smaller is better in the computer industry because the electrons have shorter distances to move so they are faster and they consume less power and they are cheaper. So everything gets better as you get things to be smaller and that's the nature of our fundamental production.
Ryssdal: Do you have a hope that in an industry that clearly you see is the future that those cycles are going to be kinder to you...those business cycles?
Otellini: As I've said, one of the things I've seen over the three decades is a lengthening out of the cycles and part of that has to do with the maturity of the industry and the maturity of the product cycles. Once the PC became ubiquitous, it was no longer as cyclical as it first was in the early days of selling say, memory chips, which is where Intel started. So I do think that as you put your product into more and more different end-user products and those products create new usage models to become more and more indispensible, the cycles are indeed kinder to you because you are more broad-based.
Ryssdal: You made a speech a number of weeks ago in Washington about the investment that Intel is going to make in the American economy . . . $7 billion to upgrade production facilities here in this country . . .
Ryssdal: Other than the fact that it's smart to make investments during a down time, why here? Why in this country?
Otellini: We have factories all over the world and from where we are today, the fastest way to get a lot of capacity on line at the next generation technology was to convert existing factories we had in the United States available. To some extent the recession allowed us to do that. The recession that we are in right now has lowered demand as you pointed out earlier. That means that our factory network world wide is running at a slower pace than it was when we were running flat out last year. That gives us the ability to consolidate production into some plants and to take other plants down and re-tool them. And so the cheapest, fastest way to get to a lot of 32 nanometer capacity was to use facilities and the work force that was already trained in Oregon, Arizona, and New Mexico. Prior to that the most advanced factories that we have running today are in Chandler, Arizona for 45-nanometer and in Israel for 45 nanometer so we had made that decision a number of years ago. The cycle went to the United States.
Ryssdal: I'm paraphrasing here but your message was, "We have an obligation to invest in this country, especially right now."
Otellini: You are paraphrasing. That's not quite what I said. What I said was we have an obligation to invest and we have an obligation to talk about an investment and I think that we were looking for other firms to follow our lead in terms of making a bet on the U.S. economy and on the fact that this cycle would end.
Ryssdal: And are you getting people to join you in that?
Otellini: So far it's pretty lonely.
Ryssdal: What do you make of that?
Otellini: I think part of it is where Intel is as a company and in the cycle, as a company we are a bellwether and that's one of the reasons that you saw us stand up. If you are a bellwether you have to ring the bell every now and then and draw attention to things. It's also, in our industry, we are the long lead time investment. So for us to make the 32 nanometers, and deploy that over the next 18 months, and run product on it that we have been designing over a number of years sends a very clear signal to our customers and to their customers that they can count on us to deliver new product next year. So if you are a Hewlett Packard or a Dell and you want to build the next generation of notebooks perhaps for 2009 and late '09, and 2010 and 2011, you'll put designers onto that this year for next years' product. They wouldn't be able to do that if they didn't know that we weren't building these new products. Otherwise you would just stick with what you had. The memory manufacturers around the world, the people who build thin-film displays around the world all see our investment and know that we are to some extent the catalytical technology which starts the whole cycle going.
Ryssdal: When you think about those kinds of things are you reacting to what they are telling you or your impression of what you think your customers want?
Otellini: Not neither because no one has a very clear view of the world today. I think everyone has their own macro-economic driven view. And our view of what can come out of our factories two or three years from now is better than anybody else's and the transformative power of these products is really best known by us, not only known by us but best known by us for sure and I think that gives us the confidence to go out and announce it. Secondly, for our company it makes good business sense. We know that our costs go down and our products get better. That's a pretty good value proposition in any economy.
Ryssdal: Intel is a company that has been run by engineers for most of its' history in the top positions. You're not an engineer, you're an MBA and you've obviously been given this job because they think you can run it, because the board thinks you can run it. Who makes the decisions in this company in terms of what you make? Is it an engineering driven thing or is it a market driven thing?
Otellini: Both. Like any company, decisions are made at all levels. We try to make our decisions as low level as possible. I'm not going to get involved in what the next generation micro-architecture is like or what the third generation of virtualization technology looks like. We have experts for that and believe me, you want the experts to make those kinds of decisions. But in terms of markets, I try to listen to what the markets need and I try to understand markets a bit more I think, than the semiconductor industry classically did. This industry was built around "build a better mousetrap and the world will beat a path to your door." That philosophy lived on forever and ever and it was best, I think exemplified by just the way the memory business went in terms of the kind of increase in densities you saw generation after generation. Or even the old processor line from 8086, the 286, the 386, the 486 . . .
Ryssdal: Cram more stuff on the chip and it gets better.
Otellini: Yeah and it just ran faster and faster and existing software ran faster and faster. Well, you run into some problems like the laws of physics. And that forced some major changes and so we started thinking about how computers were used and could be used differently a few years ago. Back in 2003 we introduced a product called Centrino which was the first real mass-market approach to taking long life, high performance, small form factor, integrated Wi-Fi product to market. And all of a sudden Notebooks took off because we created an ecosystem around Wi-Fi that make that rather ubiquitous. To me that was a market driven view of an application of technology and that's what I think we try to pride ourselves on is finding those intercept points where you can take what can be built and marry it with what people might need at the right price points and bring it to market.
Ryssdal: You have a chip, you have a new processor coming out in April. What is that intercept point going to be? What's it going to do?
Otellini: We have a new generation of architecture that we happen to call Nehalem and it came out first last November as a high-end work station product and then it was introduced the last couple days of March as a dual-processor server product. And it is the most significant leap forward in performance we've ever had or in power efficient performance we've ever had generation to generation and I think we'll continue to bring the benefits of new technology to people who need it. For example, data centers, in many big data centers around the world now the electricity cost is more than the hardware cost. Yet the need for performance goes up and up and up because the searches don't stop and Amazon doesn't stop selling books and so the ability to contain costs while offering higher performance is pretty critical.
Ryssdal: Do you ever look at what's out there in the Internet world like the searches that Google can do or the sales that Amazon can do and go, "Aw man, now we have to come up with something to meet that demand?!"
Otellini: I think it's great. You look at the internet data centers which I would put MSN and Yahoo and Google and to some extent Amazon into, they've been growth drivers but they haven't been the singular growth drivers of servers the last two years, in fact enterprise has been. And I expect even now enterprise will still be the leader with even government perhaps following up. If you look at something like even the Presidents' plan to do electronic medical records in the health care area, that's going to drive a tremendous demand for servers. Because you are going to put . . . instead of having all those clipboards in your doctors' office, you're going to have essentially a terminal and some servers are going to back up all that data somewhere. So you don't have to remember whether your grandmother had diabetes or not because the system will take care of that for you. That's a demand driver and I think that happens to be bigger than the incremental growth we are seeing in the Internet data centers.
Ryssdal: With all the areas of opportunity that you see with this company whether it's healthcare, or other kinds of servers, or consumer demand; what is the down side? What is lurking out there that keeps you up at night?
Otellini: Well you are always in this race of commoditization verses innovation and if we didn't improve our own products every year, the cost of that product, the price of that product would end up approaching not zero but some very small number. And one of the ways that you can keep the business growing is to deliver something which has more performance maybe at a slightly better price than today but not at a price where you are driving a commodity kind of environment. This is the only industry in the world where the product gets better every year and cheaper. That doesn't happen. And it costs more to develop this generation after generation.
Ryssdal: What kind of business model is that?
Otellini: Well it's the one we've got and it's not a bad one but in the grand scheme of things what it does is it drives volume and it drives innovation and much has been talked about in terms of Moore's law, the driving engine of the industry.
Ryssdal: Which says that . . .
Otellini: That the number of transistors that you can put down on a chip cost effectively will double every 24 months. That is not a law of physics. It's not like Newtonian laws, what this is the law of human . . . it reflects human achievement. Because Gordon observed that this was being done by humans, humans have picked up the gauntlet over the last 30 years and said I'm going to make it continue. And it's one of those great things because no one in the industry wants to be the one who breaks Moore's law. And that drives just this unbelievable amount of energy and innovation into the industry.
Ryssdal: With this company as dominant as it is in its field, where is the future for you . . . keeping going in a straight line to get better and better at what you do or to diversify and start thinking of other things that you can build and create and sell?
Otellini: If by diversify you mean portfolio management and we end up looking like a General Electric over time, no that's not the model that I have in mind for a bunch of reasons. We know what we are very good at. We are the best in the world at building highly complex silicon and we can do it in a cost effective manner and in a manner of which is high quality and delivers hundreds of millions of units a year, reliably. So from my perspective, given the rather unlimited view of market potential that we have in terms of driving computing into whole new classes of industries, I would rather see us lever our core skills and the asset base of our company, which is manufacturing oriented into those markets than go play in markets we don't understand like financial services for example.
Ryssdal: Staying with manufacturing, then I have to ask you about this thing that I read about Andy Grove the other day, the former Chairman of this company, the former CEO who brought it through the 80's and 90's and made Intel a household name. He says what you ought to do is get into manufacturing lithium-ion batteries for cars . . . electric cars.
Otellini: He did say that.
Ryssdal: What do you think?
Otellini: I don't think it's a very good idea for us right now. You know, Andy is still employed by the company; he's our senior advisor and I love him dearly and one of the things he does is he gets paid to give us ideas and to kind of kick us in the tail when he thinks we're not performing well. He is passionate about electric cars and he's worked back from that to understand that the limiting factor at this point and time is battery technology. Batteries are basically chemical and manufacturing therefore Intel, which is known for handling chemicals and manufacturing ought to be able to do a good job of this. I don't think that makes sense for us right now. We've looked at it and there're a lot of companies going into this, the manufacturing facilities are not leverageable in terms of using the same kinds of things. We do have some skill sets here but not what I think would give us a sustainable or even a proprietary advantage in batteries.
Ryssdal: Let me get back to the speech you made in Washington a couple of weeks ago and ask you about this investment. You have said that you want to make a 7 billion dollar investment in manufacturing in this country. I'm wondering how you came to that realization in the middle of the worst recession we've seen in 50 . . . 60 years, an incredible credit squeeze when people are just nervous about their jobs, let alone what they're going to do in terms of buying new computers?
Otellini: Well it was really two phased. First was this is that part of our technology cycle where we have to make the decision to deploy or not deploy on next generation technology, and if we deploy it, how large and in what capacity areas, what states, what countries and so forth? We made a decision. We said that it was very clear to us that economically that the technology is very solid, we've got it working, we've got products designed on it and it makes sense for us to deploy this in high volume even in this environment simply because of the cost argument that I made earlier. The second phase then is how do you announce it? We typically would not be doing a large announcement. We certainly wouldn't do it in Washington over this, we'd go to the Oregon site or the Arizona site and say, "We are happy to be here with Govenor XYZ and creating a factory that will employ 2000 people" or something like that. I thought it was important for Intel and for the country and for us to take a departure from that model and have a 'Mr. Smith goes to Washington' moment where we went there and we did this announcement there in the middle of a crisis of confidence. A lot has happened in the last 60 days but this was, I think February 10th and at the time there was no good news on the economy. Now you're starting to see some stabilization out there. And I thought it was important to make this announcement and say we can do this with our money, not with government money, and that it was a call for action from other industries to try to follow suit. And as I've said earlier, it's not been echoed but I think that it was certainly noticed and I think not just in the government but in other companies. And I do think that us making this announcement has provided some stabilization in the overall economic health of the country.
Ryssdal: Did you ever think or did a member of the Board of the Finance Committee come to you and say, "Hey listen Paul, should we just hang onto that cash. Do you think that would be smarter?"
Otellini: Nope. It was not a discussion. As I've said we run the numbers, we just don't do this because it's ready. We run the numbers. We're driven by data in this company and the numbers say it makes sense strategically and financially to go ahead.
Ryssdal: What is your view of the economy right now?
Otellini: I think that we're in a very turbulent time that is subject to a lot of experimentation. And I recently read a couple of books on the Depression, the 30's timeframe, one from a financial author and one from a biographer. And both of them say that when you read through the history of that period particularly in the early part of that period after Roosevelt was elected, '32 - '33, there was an awful lot of experimentation. And to me this feels like what we are seeing today. Nobody knows the right answer and they're trying different things and ultimately they'll come up with what works or maybe the market just works. But to me this is analogous. I don't think what is dramatically different from the 30's to today is that we are in a globally interconnected economy. And that's good, that's very good. I think one of the reasons you have not seen any country really fall off the cart entirely even though there are some extreme situations in say Russia, or you saw one in Brazil early on, but right now the fact that it is an inter-balanced system seems to be benefitting all of us.
Ryssdal: Of course, part of the reason that it got so bad so fast is that we are all inter-connected in this economy.
Otellini: Yeah. I think that is part of the reason but I'm not sure that it is the overwhelming one.
Ryssdal: How are you going to know that it's back? How are you going to look at it and say, "Oh yeah, this is real."
Otellini: When the things stop getting worse.
Ryssdal: What's your indicator?
Otellini: We're in a quiet period now so I really don't want to go into that but we would look at our revenue rollups for the quarter, we'd look at order indications, we'd look at sales out of our customers product, we'd look at inventory trends in the channel, we would look at the availability of credit to our small dealers around the world on a global basis and when there is an inflection in those, when things stop getting worse, then stabilize, and then start getting better, you start beginning to predict trends out of that.
Ryssdal: Do you think that you are going to know? Are you going to be able to look at something and say, "Okay, here we are?"
Otellini: I would hope so. And again, I don't want to say ahead of time our earnings call but I do think that those are reliable indicators for us.
Ryssdal: What's next for Intel?
Otellini: For us it's really getting a significant amount of traction outside of our historic, traditional mainstream businesses of servers, PCs, workstations, and so forth . . . notebooks. And initially you'll see it into new kinds of computing products like these Netbooks I mentioned earlier, then into consumer electronics, into embedded systems, and ultimately into phones.
Ryssdal: Mobile wireless first?...and then into phones.
Ryssdal: Are we going to have the Intel phone?
Otellini: No. I think we will like to build the chips that go inside phones. But you'll see us not just building the silicon here but also enabling the software and the applications and the wireless ecosystem around it. Intel is one of the key proponents and IP owners . . . initial property owners of technology called WiMax, which is one of the candidates to be the fourth generation wireless technology. We'll see how it goes.
Ryssdal: And when you say patent holder . . . there's a market here for you. I mean you can make some money here doing this.
Otellini: Oh sure. Unlike other companies, we don't use our initial property to collect royalties, we wrap them around our products and sell it.
Ryssdal: Sell it outright. There you go! Paul Otellini, President and CEO of Intel. Thanks very much!
Otellini: You're welcome. Thank you.