Intel to temporarily reduce desktop chipset production

A strong increase in demand for mobile PCs will force Intel to temporarily pull back from the low-end desktop chipset market.

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 earlier reports that Intel was planning to exit the low-end chipset business altogether, but said Intel was prioritising 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.

Intel's chief financial officer, Andy Bryant, 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 would meet previous supply commitments with PC manufacturers, but it wouldn't be able to capitalise on all of the excess demand it was 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 emphasise chipset features such as virtualisation technology as a main selling point for PCs in the future.

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

PC vendors had a vested interest in Intel producing enough mobile chipsets to meet their needs, principal analyst with Insight 64, Nathan Brookwood, said. Under Intel's Centrino marketing program, PC vendors received marketing assistance from Intel if they used 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 made more money on the sale of mobile chipsets than low-end desktop chipsets, Brookwood said.

The same was true for PC vendors, where profit margins for notebooks were better than desktops, he said.

But Intel remained committed to the entire chipset market, Kircos said. The company had 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 did not plan to seek extra capacity from foundries such as Taiwan Semiconductor Manufacturing, United Microelectronics or other contract chip manufacturers, he said.

This would 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 did not require advanced manufacturing capabilities and allowed 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 would be filled by companies such as Via Technologies, Silicon Integrated Systems, ATI Technologies and Nvidia.

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