What Business Strategy Is Behind Intel’s Plan To Lay Off 15% Of Workforce?

Intel has announced plans to cut 15% of its workforce, roughly 15,000 jobs, as part of a strategic overhaul aimed at competing more effectively with rivals like Nvidia and AMD. In a memo to employees, CEO Pat Gelsinger stated that the company aims to save $10 billion by 2025.

“Simply put, we must align our cost structure with our new operating model and fundamentally change the way we operate,” Gelsinger wrote, citing stagnant revenues and the company's inability to capitalize on emerging trends like artificial intelligence (AI).

The job cuts follow a disappointing quarter for Intel. The company will also announce an "enhanced retirement offering" and a voluntary departure program next week.

“This is the hardest thing I’ve done in my career,” Gelsinger said, with the majority of layoffs expected to be completed this year. As part of its cost-cutting measures, Intel will also suspend its stock dividend.

Intel reported a second-quarter loss of $1.6 billion, or 38 cents per share, compared to a profit of $1.5 billion, or 35 cents per share, a year earlier. Revenue declined slightly from $12.9 billion to $12.8 billion. Analysts had expected earnings of 10 cents per share on revenue of $12.9 billion.

Following the announcement, Intel's stock dropped 19% in after-hours trading, potentially erasing $24 billion from its market value when the market opens on Friday.

eMarketer analyst Jacob Bourne commented that while Intel's cost-cutting may improve its near-term financials, it alone will not redefine its position in the competitive chip market. Intel is at a critical juncture, leveraging US investments in domestic manufacturing and the rising demand for AI chips.

Gelsinger emphasized the long-term benefits of investments in the AI PC market, predicting that AI PCs will grow from less than 10% of the market today to more than 50% by 2026.

Intel, which both designs and manufactures chips, is expanding its foundry business in the US, competing with giants like Taiwan Semiconductor Manufacturing Co. (TSMC). Gelsinger’s lobbying has made Intel a major beneficiary of the 2022 CHIPS and Science Act, which aims to bolster domestic chip manufacturing.

In March, President Joe Biden celebrated a deal providing Intel with up to $8.5 billion in direct funding and $11 billion in loans for new chip plants across the U.S., highlighting the investment as a way of “bringing the future back to America.”

Intel’s planned $20 billion plant near Columbus, Ohio, is expected to create 7,000 construction jobs and 3,000 full-time jobs with an average salary of $135,000 a year. Bourne noted that while Intel is earmarked for substantial government investment, building the necessary infrastructure and upskilling the local workforce will take time.