February 1, 2011

Intel Finds Chip Flaw, Implementing Solution

Microprocessor giant Intel Corp, on the verge of a major product launch, found a defect in one of its chips, which could affect its credibility at a time when demand for microprocessors in PCs is being threatened.

Intel said Monday that it had stopped shipments of the chip used in personal computers and has already started production on a new version of its Sandy Bridge line of processors.

The design flaw is another distraction for Intel, as personal computer sales are slow moving, and a growing demand for mobile devices heats up the market -- a market dominated by Britain's ARM Holdings.

"Does it change the perception of Intel's quality? Yes, probably. You've got real product out there that's been qualified and tested and green-lighted, and then you come back to say there's a problem and you have to recall," Wedbush analyst, Patrick Wang, told Reuters.

Intel slashed its first-quarter revenue forecast by $300 million and expects the cost to repair and replace the flawed chips to be in the neighborhood of $700 million. It doesn't foresee any full-year revenue shortfalls.

The defect was found after the company shipped more than 100,000 chips to computer makers getting ready to sell new PC models with the new Sandy Bridge processor, which Intel boasts as its biggest-ever leap in processing power.

If the problem remained unnoticed, the company said about 5 percent of computers running the new chipsets could have failed over a three-year period, Stephen Smith, vice president and director of PC Client Operations at Intel, said during a conference call with Reuters.

"It would be a low and continuing failure rate over the life of the systems," he said.

Investors predicted that Intel's setback could give Advanced Micro Devices (AMD) -- a smaller rival of Intel -- an edge in the microprocessor market.

AMD is launching its own lineup of processors this year, codenamed Fusion, which will compete with Intel's Sandy Bridge chips in the PC market.

Intel said its engineers discovered the chip flaw last week after manufacturers stress-tested the chips with high voltage and temperatures. The design flaw could have stopped computers from being able to communicate with their hard disk drives or DVD drives.

"It's obviously a negative and a surprise. We think they can recover from this very quickly. This product was just being introduced and there's not many in the field," said Kevin Cassidy, an analyst at Stifel Nicolaus.

The chip flaw, along with its recent acquisition of German chipmaker Infineon Technologies AG's wireless division, plus the purchase of security software firm McAfee, expected to close this quarter, prompted Intel to revise its revenue outlook.

Despite slowing growth in PC sales in 2010, the Semiconductor Industry Association said Monday that worldwide chip sales for the year rose 32 percent to a record $298.3 billion. However, it warned that this year it expected only "moderate single-digit growth" for the industry as a whole, as the uncertain economy continues to suppress growth in demand.

While Intel's chips are found in 80 percent of the world's personal computers, the company has yet to make its mark in the mobile sector that is increasingly gaining momentum in the Internet connected world.


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