Latest Intel recall hurts its image: Analysts

Nicole Volpe

NEW YORK: Intel Corp's Chief Executive Craig Barret said on Tuesday that the
company had fallen short in the development of its newest and fastest chip,
which the chipmaker was forced to recall on Monday.

"We should have done a better job," he said, speaking to Reuters in
Buenos Aires on Tuesday, during his tour of South America. "We know what
the problem is and are in the process of fixing it to ship new product."

The recall of the 1.13 gigahertz chip was not expected to hurt the
chipmaker's financial results, but this latest in a series of technical snafus
would damage its reputation, analysts said on Tuesday.

"While the financial impact is negligible, it makes Intel look bad to
their customers," US Bancorp Piper Jaffray analyst Ashok Kumar wrote in a
note to clients. "The company is announcing products they cannot ship, and
it turns out, do not even work properly."

Chip introduced in July

Intel, whose processors are the brains of 80 per cent of personal computers,
only introduced the new chip in July. It said Monday it had discovered the chip
could fail under a certain combination of data, voltage and temperature
conditions.

The new chip, Intel's fastest, is targeted at a niche market of computer
hobbyists and "power users," whose computers are running the most
taxing applications.

"I don't think we did as good a job as we might in that we overlooked a
few obscure applications," said Barret.

Intel said the recall would have no material effect on sales or earnings.

Shares were little changed by the news, closing up 3/16 to 74-1/16 on Nasdaq.

An Intel spokesman said the chip had only shipped to "a handful of
customers," including International Business Machines Corp. and Dell
Computer Corp., but declined to comment on exactly how many chips had been
shipped.

"We estimate that the company has shipped less than 10,000 units and, as
such, the financial toll is negligible," said Kumar. "Also, given that
these products populate high-end systems priced at about $3,000, the opportunity
cost is minimal."

Not Intel's first recall

While the recall was small in size, it was not the first. In 1995, Intel
recalled its first Pentium due to a flaw, in what was cited by then chief
executive Andrew Grove in his book Only the Paranoid Survive as a defining event
for the company as it became a household name.

Last year, Intel recalled its Intel 820 chipset due to a design flaw in
technology provided by Rambus Inc. In May, Intel recalled defective motherboards
- the internal chassis that hold memory components in personal computers.

Salomon Smith Barney analyst Jonathan Joseph said that the small size of the
current recall made it "no big deal."

"This is not a black eye, this is a nit," he said. "The
magnitude of this recall is infinitesimal. It is in no way comparable to the
1995 Pentium recall."

But Kumar said the implications of the recall were more serious than its size
would suggest. He blamed Intel's race against AMD to the claim to the fastest
chip as part of the problem.

"This is another sign that the 1.13 gigahertz chip is pushing the
envelope for an architecture developed for 2 gigahertz speeds," he said,
noting that Intel had missed the transition to copper interconnects on its 0.18
micron process, and was using a core that was five years old.

"Essentially, they are pushing an aging architecture to keep pace with
AMD's Athlon, to have bragging rights to the fastest processor," he said.
"Intel should have introduced the P4 a long time ago. Their research and
development budget is much larger than AMD's. That they can't keep pace with
such a small competitor as AMD speaks volumes about the company."

Intel's Barret, however, said that the chip's trouble was not due to trying
to pace AMD.

"I don't think it was an issue of getting it out before the
competition," he said, adding that the company's Pentium 4 would be
available in October or November.

Customers may grow impatient

But, Kumar warned Intel's flawed chip could test the patience of its customers.

"Intel having this reoccur on a constant basis is just stretching the
relationships with OEMs," he said, referring to original equipment
manufacturers such as IBM and Dell.

However, those computer makers, which both received shipments of the faulty
chips, said they did not yet see cause to alter their relationships with Intel.

IBM had begun shipping some Aptiva desktop computers with the chips, a
spokesman said.

"We don't know exactly what we are going to replace these chips with
right now," said IBM spokesman Tim Blair, adding that IBM was working on
how to get parts back from customers.

Dell Computer Corp. had planned to ship products with the new chip last
Friday, and was told by Intel to hold off, a Dell spokesman said.

"We were taking orders starting July 31 and anticipating shipment on
August 25, when some of issues began to come up," said Dell spokesman Tom
Kehoe. "We found out on Monday we would not able to ship them at all, so we
will be offering a one-gigahertz system to those who have placed orders."

Dell, which relies solely on Intel for its processors, would not have any
material impact on sales or earnings, and was not considering a change in their
relationship with Intel, Kehoe said.

(C) Reuters Limited 2000.