Intel's CFO forsees more capacity constraints in '06

Intel's capacity constraints will start to ease in 2006 as new manufacturing plants come online, according to the company's CFO.

Intel's manufacturing plants will still operate at nearly full capacity next year as new technologies are rolled out, but the tide could shift in 2007, the company's chief financial officer said Wednesday.

Demand for PCs and servers has been stronger than originally expected this year and Intel's factories have been running almost flat-out the entire year, forcing the company to temporarily pull back from building low-margin products such as low-end desktop chipsets. As new fabs and manufacturing technologies come online in 2006, that crunch will ease slightly, said Andy Bryant, Intel's chief financial officer, speaking at Intel's main U.S. manufacturing facility in Hillsboro, Oregon.

Intel is expanding capacity at a fab in Ireland and moving two U.S. factories to its 65-nanometer processing technology, which will free up capacity on older manufacturing technologies for chipsets, Bryant said. But that process takes a while, and chipset supplies should still be fairly tight during most of 2006, he said.

By 2007, the supply-demand balance could tip back as Intel's facilities reach full production and Advanced Micro Devices Inc. also reaches full production at a new facility in Dresden, Germany. This could affect chip prices in 2007, Bryant suggested.

"We're not looking at a price war [in 2006]. But in 2007 I'm looking at demand and wondering about capacity," Bryant said in response to a question about future capacity planning.

Intel executives are generally reluctant to forecast capacity demand over an entire year, so Bryant's willingness to share projections for 2006 is an encouraging sign that the company feels good about demand and its capacity next year, said Mark Edelstone, a financial analyst with Morgan Stanley.

For the last several quarters, prognosticators have predicted that PC demand will slow in upcoming years, although analysts such as IDC and Gartner Inc. underestimated demand for PCs in 2005. Capacity planning is a delicate balance of making sure Intel doesn't miss out on business because of capacity constraints, or incur painful inventory write-offs by getting stuck with an oversupply of processors. But Intel would prefer to have a little extra capacity than needed, Bryant said.

"The cost of not meeting an order is more than the cost of extra inventory," Bryant said.

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