Before the 2008 recession, Intel pushed out rivals by keeping its product cycles tight. With a philosophy that innovation would move the market in its favor, Intel devoted itself to delivering the fastest and latest technologies. Being ahead of the development curve allowed Intel to set the pace, leaving rivals scrambling to follow.
This strategy seemed to be working well. As customer demand shifted towards mobile chipsets, Intel was ready. By the end of 2007, Intel had increased its net revenue to $38.3 billion in 2007 – an 8% increase from 2006.
But as the recession set in by the end of 2007, Intel was also vulnerable to those changing demands. Are you ready to face the impacts of another recession? Take SBIs Revenue Growth Maturity Model Diagnostic to find out.
How Did the Recession Affect Intel?
After all, everyone needs computers, poor economy or not. And Intel supplies some of their core components. Were they able to keep demand for their products high despite the economy crashing?
Intel relied strongly on orders from Dell and HP to make its revenue – Dell was responsible for 18% of net revenue and HP for 17%. And device manufacturers were hit hard during the recession. Dell went through a hiring freeze and even asked employees to take as many as five unpaid days off. Intel’s rival, AMD, laid off more than 1000 employees once the personal computer market declined. And Motorola was forced to lay off 3000 employees.
Intel also relied heavily on growing demand in emerging markets. While the Americas only increased their revenues by 3% in 2007, Asia-Pacific increased theirs by 11%. And the majority of the increase in Asia-Pacific came from emerging markets. But as we know, the recession hit emerging markets, too, and the demand for personal computers there waned considerably after 2007.
Unfortunately for Intel, they, too, were not immune. Reduced demand led to a 90% decline of net income for the 4th quarter of 2008 compared to Q4 2007. And revenue and EBITDA showed declines year over year as well throughout the recession:
Slowing Demand Took Its Toll on Intel
How did Intel respond to such drastic reductions in demand? Not surprisingly, Intel stated in its 2008 Annual Report that, “our gross margin toward the end of the year was impacted by approximately $250 million of factory under-utilization charges as well as inventory write-offs on computing-related products, which were primarily demand-related.”
With slowing demand, Intel joined the ranks of other device manufacturers – by January 2009, they laid off 6,000 people and closed four assembly plants and test facilities.
Weak demand necessitated cost-cutting and restructuring. Very few firms at the time could survive the recession without making adjustments. But what sets Intel apart are some of the adjustments that they didn’t make.
“You Can’t Save Your Way out of a Recession,” Says Intel
Intel had prided itself on staying cutting edge in its product lines. That type of innovation relies on an incredible amount of resources being devoted to research and development. Many firms chose to scale back on any unnecessary costs during the recession, including R&D. But Intel has always viewed R&D as the lifeblood of the tech industry and its own survival.
Throughout the recession, Intel continued its rate of R&D:
Intel claimed, “people do not want to buy technology that is two years out of date when we come out of the recession. Intel continues to invest in R&D despite the downturn.”
The continued investment in R&D left Intel several years ahead of competitors. Intel had shifted its production in 2009 from the 45-nm processor to the 32-nm processors. Its long-time rival AMD was not slated to be able to compete with Intel’s 45-nm processor until 2010. And AMD’s 32-nm processing chip? It wasn’t expected until 2011.
Intel also realigned its manufacturing and marketing. Before the recession, they would meet once a month to plan the appropriate type and amount of chips to produce based on marketing’s demand data. That process shifted from once a month to twice a week. Staying attuned to market needs allowed manufacturing to make quick adjustments and not find itself in any more restructuring binds.
But Did It Pay Off?
By the end of 2009, the economy had begun its recovery, and so had the demand for computers. Intel was ready to meet that demand with the latest microprocessors on the market. Fourth quarter revenue in 2009 was up 13% from the third quarter and 28% year over year.
In fact, Intel even set a new quarterly record – their gross margin percentage for the 4th quarter of 2009 was 64.7%. Intel attributed the record-breaking margins to “lower inventory write-offs, higher microprocessor average selling prices and unit sales, the lack of excess capacity charges, and improving unit costs.”
Intel held tight to its focus on R&D while making sure that its manufacturing processes were in tune to match the shifts and needs of the market. And EBITA almost doubled from 2009 to 2010.
Intel Proves That Market Knowledge Is Power
Intel knows its market. This market knowledge is critical when driving its research and development strategy and its overall operations.
Is your company ready to face shifts in demand? Take the SBI Revenue Growth Maturity Model Diagnostic to find out.
Whether it’s the next recession or a competitive threat of better products or better customer service, companies who survive the vagaries of the market are those who can adapt. And knowing your customers is the first step to being ahead of the curve. SBI can help make sure that you know how to align your marketing strategy with your product strategy to make sure that you’re ready to meet demand now and in the future.