Intel's Steve Long On CPU Shortage: 'We Undercalled Demand As An Industry' For PCs

Intel's commercial PC business was so good last year that it caught the semiconductor giant off-guard and contributed to its ongoing CPU shortage, according to Intel sales executive Steve Long.

"I think the biggest thing that the whole industry, including our partners, miscalled overall and why the market did better — it was commercial," he told CRN in an interview at the Intel Partner Connect conference, where he discussed how the PC market, the shortage and how Intel is addressing it.

[Related: Intel Reveals Long-Awaited Ice Lake 10nm CPUs At CES 2019]

As the head of sales for Intel's Client Computing Group, Long is charged with driving sales for the company's long-time breadwinner: processors for desktops, laptops and other client devices. While the chipmaker's PC business is its largest revenue driver right now — accounting for more than half of the company's $70.8 billion in revenue in 2018 — Intel expects its data-centric businesses, including the Data Center Group, to become the new cash cow over time, pointing to a $300 billion total addressable market.

Long is aware of this fact and Intel's stated drive to become a "data-centric" company, but he said that doesn't mean the PC business is being left behind — something that was underlined by Intel's high single-digit growth in the Client Computing Group last year.

"The client business grew last year for the third consecutive year in a row, so for this client business, it gets labeled and has been written about [as] this sleepy, boring old category that's done," Long said. "It's like hey, three years of growth."

While the Client Computing Group saw revenue growth in the low single digits in 2016 and 2017, it was in 2018 when sales exploded unexpectedly, with a 9 percent year-over-year increase in revenue.

Long said commercial PC sales, one of the largest revenue drivers that Intel had underestimated, was led by a Windows 10 and hardware refresh.

"There are some tailwinds generated by that, which remain by the way, because we're maybe halfway through that transition," he said, adding that commercial, Chromebooks, modern laptops and gaming all have been enjoying double-digit growth.

This unexpected demand in processors for PCs, however, ended up having a negative impact, contributing to the company's CPU shortage, which has created a dent in sales for channel partners and OEMs.

"The first [overarching] thing is we undercalled demand, as an industry," Long said.

Putting a further strain on Intel's production of client processors was the fact that other business units, including one of its fastest-growing divisions, the Data Center Group, were performing better than Intel had predicted, according to Long. The company's modem business also put a strain on overall manufacturing capacity.

This meant Intel has had to make trade-offs on which processors and components to target for production — which has been reflected in its statements about prioritizing higher-end CPUs for client and data center over other models.

"We wanted to make sure that our data-centric businesses were filled and taken care of," Long said.

To stay on top of these matters, Intel holds what Long called an "output max meeting" every week, "where we make some of those trade-off calls and make sure that we're progressing." The company then provides channel partners guidance for production levels of certain processors under NDA, Long said, though he admitted that the company can still do a better job of getting information out to more partners.

Beyond making trade-off calls, Intel has invested $2 billion in additional manufacturing capacity that Long said will come online in the second half of this year, which is when the company expects the shortage to end. The company is also creating incentives for channel partners to sell the F-series line client processors that have their integrated graphics disabled due to manufacturing issues.

Kent Tibbils, vice president of marketing at Fremont, Calif.-based distributor ASI, said Intel's focus on high-end processors is a "big benefit" for the channel because the systems they go in bring in the most revenue as the result of other components, such as memory and graphics.

"Intel has also been very open about the availability, and I think they’ve been very creative in looking for solutions such as the new F-series processors that don’t have integrated graphics," he said in an email.

There were a few reasons Intel had underestimated sales growth for the PC business last year, according to Long. One had to do with mindset, in which the company saw the increasing relevance of smartphones and tablets in the workforce and assumed that PC wouldn't see a return to growth.

"You get into this mindset of well, if a substitute disrupted me in 2010, 2011, you almost draw a line and say, 'I think this is just going to continue,' despite innovation, despite [the fact that] we're still spending billions of dollars of R&D in the PC category," Long said, adding that the company is spending more in research and development for the Client Computing Group than it did three years ago.

A misreading of some macroeconomic signals was another reason for Intel underestimating PC sales growth, according to the executive. For one, Long said, the U.S. tax reform bill passed last year spurred more IT spending — which itself was driven in part by Microsoft's support for Windows 7 coming to an end. Long added that the volatility of the U.S. dollar stabilized in South America, among other emerging markets, which prompted more spending.

Long said the company is applying what it learned from 2018 for this year so that it can have a better handle on sales forecasting. This means "triangulating" with other companies on usage trends.

"Microsoft has really good visibility with some of their telemetry data that they have about activations and things," Long said, "and we have created synchronization processes where we can share each other's market insights — and we do that with all of our different partners."

Long said there was a point in 2010 or 2011, before the PC market was truly disrupted by mobile devices, when PC sales reached 1 million per day. As the company gets closer to the end of the shortage and supply and demand come into balance, the executive said he believes the industry will get there again.

"I always joke and say it'll be like 2 in the morning when we're asleep — that's when the two lines will cross each other — and all the sudden we're on the other side, and we're generating demand to get back to a million units of PCs a day," Long said.