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Intel Corp. Biting the Bullet on 10-Nano Production

Ashraf Eassa, The Motley Fool

Chip giant Intel (NASDAQ: INTC) has long prided itself on its ability to migrate to new chip manufacturing technologies that offer substantial performance, power, and area benefits compared to prior-generation technologies at a dependable cadence.

The last such technology transition was to its 14-nanometer technology, which first went into mass production in the second half of 2014. Intel was originally planning to go into production on the follow-on to its 14-nanometer technology, known as 10-nanometer, by the second half of 2016, but the schedule continued to face delay after delay

Intel's Xeon Scalable line of processors.

Image source: Intel.

As of this writing in early February 2018, Intel has not announced a single product manufactured using its 10-nanometer technology. 

On the Jan. 25 earnings conference call, CEO Brian Krzanich claimed that the company shipped its "first low-volume" 10-nanometer part, though CFO Bob Swan later indicated that the real volume ramp of its 10-nanometer technology wouldn't happen until the second half of 2018. 

That's the bad news. The good news is that it seems that there is now real financial evidence to suggest that Intel's 10-nanometer technology will finally go into production. Let's go over that evidence and what it means for the company's business. 

The margin forecast contemplates 10-nano ramp-up

Swan said that the company expects its gross profit margin percentage for full-year 2018 to decline by between 200 and 250 basis points from the 62.3% it enjoyed during full-year 2017. 

That reduction, Swan said, is "driven by growth in [Intel's] adjacent businesses as [Intel] play[s] in an expanded [total addressable market] and transition costs associated with 10-nanometer." 

A wafer of Intel processors.

Image source: Intel.

Swan also indicated that continued improvements in its currently shipping 14-nanometer technology would offset some of the impact from the transition to 10-nanometer, so the negative impact from the 10-nanometer transition is even bigger than the overall decline in Intel's gross profit margin percentage would imply.

It's obviously not great that the transition costs involved in bringing 10-nanometer factories online will substantially weigh on gross profit margins this year, but the fact that Intel is giving explicit guidance for the impact that this transition will have means that the odds are high that the company will, in fact, start mass-producing 10-nanometer products sometime in the second half of 2018. 

In that case, we may begin to see Intel launch real, viable products built using the technology in the first half of 2019. 

What this means for Intel

One of the problems with the delays that Intel has faced with its 10-nanometer technology is that Intel has been forced to roll out additional products built using its less advanced 14-nanometer technology in place of the 10-nanometer parts that were originally intended to come out. 

Those substitute products, by virtue of the fact that they were added at the proverbial last minute, aren't as advanced in terms of design and capabilities as their 10-nanometer counterparts would have been. Ultimately, that was bad for Intel's competitive positioning as well as for innovation across the markets it serves. 

Now that it seems that Intel is finally going to bring its 10-nanometer technology into production, it'll be able to unleash the pipeline of product innovation that has long been stalled thanks to the delay of that technology.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.