The fourth comes forth - interview with Intel CEO Craig Barrett - Cover Story - Interview

Chief Executive, The, Oct, 1998 by J.P. Donlon

To paraphrase Craig Barrett's predecessor, it's wise to stay paranoid.

Robert Noyce, Gordon Moore, Andy Grove, and now...Craig Barrett. In Intel's 30-year history, its first three leaders achieved Mount Rushmore-like status in the American semiconductor industry - if not in world technology. Noyce, an inventor of the integrated circuit, Moore, who set forth a commercial principle that bears his name, and Grove, the exponent of "high-output management" and the man who explained why only the "paranoid" survive, were present at Intel's founding. Grove (1997's Chief Executive of the Year) steered the company through several near disasters and succeeded in making it the leading maker of microprocessors - essentially the brains for most personal and other computers systems - in the world. Earlier this year, Grove handed the CEO baton to Barrett while staying on as chairman.

A man of quiet, almost professorial, manner, Barrett, 59, is a native San Franciscan who left a Stanford University associate professorship to join Intel in 1974 as a technology development manager. With several degrees in materials science, he is the author of more than 40 technical papers on the subject, as well as a textbook, Principles of Engineering Materials, which remains in use today in universities throughout the U.S.

Barrett's 24-year career at Intel has been anchored in product development and high-volume manufacturing. He became a vice president in 1984, executive vice president in 1990, and COO in 1993. Although new to his current job, observers note that the 6 foot 2 inch Gary Cooper-like figure, who favors Western string neckwear and enjoys riding horseback on his Idaho ranch, has already placed his sizable footprint on the company. "He's a scientist first, not a technologist," observes Cypress Semiconductor CEO T.J. Rodgers. "It was his scientific approach that pulled Intel's then-mediocre manufacturing process into the powerhouse it is today. Grove tried but couldn't do it. In frustration he turned to Barrett who did."

Just as Grove faced one of Intel's so-called strategic inflection points when he took control in 1986, Barrett is taking over at a time when the industry's tectonic plates appear to be shifting again. The semiconductor industry is in the third year of a slump, its worst ever. And it's not just the effects of currency devaluations in Asia. Sales of PCs are falling short of expectations. Manufacturers have been forced to cut back to adjust to slower growth and to create build-to-order schemes, putting the brakes on chip demand.

Intel, which ships more than three-fourths of the microprocessors used in PCs, faces competition from compatible manufacturers such as AMD and Cyrix, both of which have made inroads, although neither has proven able to keep up with Intel's technology on a sustained basis. Intel's share of unit shipments is expected to drop from 86 percent in 1997 to 81 percent in 1998. Its 29 percent decline in earnings and fiat revenues for the second quarter of this year did little to lift industry spirits. Observers who had been predicting worldwide chip sales of $200 billion by 2000 are now thinking the industry will be lucky to get back to a 1997 sales rate of $135 billion. The global slowdown has already caused the company to cut back 3,000 from its 67,000 workforce.

The emergence of the sub-$1,000 PC, where Intel has 45 percent of the market versus more than 99 percent for high-end PCs, has also taken the wind out of its sales. Intel's low-end chip, Celeron, which has received mixed reviews, is its late entry into the sub-$1,000 PC market and costs PC makers approximately $140 to $180 - far below the $500 that Intel normally commands for a new chip. Falling chip prices don't necessarily mean lower profit margins if manufacturers can lower costs faster through greater manufacturing efficiency - a key strength of Barrett's. Nonetheless, bigger challenges may be on the horizon. It was easier to convince customers to upgrade when software advancements drove new PC purchases. Today, more users believe that low-end machines are powerful enough. Also, semiconductors may be redirected by the emergence of a new class of products - new generation wireless computing devices, and telephones, as well as Internet and home appliances linked to networks that require specific low-cost chips. (Intel's share of the 98 million non-PC device units in 1997 was 9.6 percent compared with Hitachi's 24.3 percent.)

Few doubt Intel's command of the microprocessor market. With plans to spend $4.7 billion on new plant and equipment and almost $2.8 billion on R&D this year, the company will maintain its market leadership. But it is sobering to note that on the very day the U.S. Federal Trade Commission filed antitrust charges against the Santa Clara giant for "monopolistic practices," the company slashed prices on its desktop PC microprocessors by 12 percent to 32 percent. It's a decaffeinated monopoly that can't control prices.

Widely respected, Barrett is said to be the right man to lead the $25 billion giant through what his predecessor might describe as another strategic inflection point. Given the industry shifts, will Intel's historic strengths continue to prevail? "Intel has always been a company where marketing triumphs over technology," says Jonathan Joseph, semiconductor analyst at NationsBanc Montgomery Securities. "Seldom is Intel the first to introduce a new technology or process, but once it sees a good one, it seizes upon it and capitalizes more aggressively and more rapidly than others." Yet, some IT experts, such as Randy Fields, chairman of Park City Group, wonder whether Intel is in the position IBM was in the '60s in terms of having created a market dominance that is no longer sustainable. "Up to now the market has supported chip branding and the premium price charged, but with the sub-$1000 PC, it's not the chip being branded, but finally the PC maker. When you get down to a $400 PC by the end of next year, followed by a $299 PC after that, can Intel compete in that market? It takes them perilously close to the D-ram market they got out of years ago."