Intel to temporarily reduce desktop chipset production

Stronger-than-expected PC demand will force Intel to concentrate on the high end of the chipset market later this year, as rapidly filling factories put the squeeze on the company's production capacity.

Intel spokesman Bill Kircos denied reports from earlier on Wednesday that Intel is planning to exit the low-end chipset business altogether, but said Intel is "prioritizing manufacturing schedules" to focus on certain types of chipsets amid capacity constraints. He declined to specify which products would be affected by the adjustments, but a source familiar with Intel's plans said the move would affect various chipsets for low-end PCs.

Andy Bryant, Intel's chief financial officer, warned reporters and financial analysts last month that Intel might have problems with chipset supplies in the second half of the year. So far this year, PC demand has been much stronger than forecast by market researchers such as IDC and Gartner and Intel's factories were full during the second quarter, traditionally the slowest quarter for PC and chip vendors.

Intel will meet previous supply commitments with PC manufacturers, but it won't be able to capitalize on all of the excess demand it is seeing, Kircos said.

Chipsets have become a much more important piece of Intel's strategy in the last year as the company brings the "platform" concept pioneered by its Centrino notebook chips to other products. A chipset is a collection of chips that connects a PC or server's main processor to system memory, I/O and storage components. Intel's Pentium M processor and mobile chipsets were designed in concert as part of the Centrino package to save power and improve performance, and Intel plans to emphasize chipset features such as virtualization technology as a main selling point for PCs in the future.

However, with its factories running at or near capacity, the world's largest chip maker needed to adjust its manufacturing lines to meet customer demand, Kircos said. Right now, demand is strongest for mobile products such as Centrino, he said.

PC vendors have a vested interest in Intel producing enough mobile chipsets to meet their needs, said Nathan Brookwood, principal analyst with Insight 64 in Saratoga, California. Under Intel's Centrino marketing program, PC vendors receive marketing assistance from Intel if they use all three parts of the Centrino package: the Pentium M, one of Intel's mobile chipsets and an Intel wireless chip, he said.

Intel also makes more money on the sale of mobile chipsets than low-end desktop chipsets, Brookwood said. The same is true for PC vendors, where profit margins for notebooks are better than desktops, he said.

But Intel remains committed to the entire chipset market, Kircos said. The company has additional production capacity coming online later this year with the conversion of an existing manufacturing facility in Arizona to accommodate larger silicon wafers, and plans to open a new wing of a plant in Ireland next year. Intel does not plan to seek extra capacity from foundries such as Taiwan Semiconductor Manufacturing Co., United Microelectronics or other contract chip manufacturers, he said.

This will free up capacity on older manufacturing equipment for chipset production, Brookwood said. Intel's main priority, of course, is processor production and the company's processors are made on the chip industry's latest and greatest equipment. However, chipsets do not require advanced manufacturing capabilities and allow Intel to generate revenue from older factories that would otherwise sit idle or be replaced, he said.

In the meantime, the slack in desktop chipset production will be filled by companies such as Via Technologies, Silicon Integrated Systems, ATI Technologies and Nvidia.