Intel to Take $700M Hit on Flawed Chip Design

{complink 2657|Intel Corp.} lowered its gross profit margin forecast for the ongoing quarter by several percentage points and slashed sales outlook for the period by $300 million because of a design flaw identified in one of its chipset circuit.

The company said it has started working on a fix for the problem but noted that the solution could cost up to $700 million. Intel said the chipsets affected by the flaw began shipping in the second week of January, adding that personal computer OEMs had been notified and were working with customers to correct the error.

The Intel statement read, in part:

    The chipset is utilized in PCs with Intel's latest Second Generation Intel Core processors, code-named Sandy Bridge. Intel has stopped shipment of the affected support chip from its factories. Intel has corrected the design issue, and has begun manufacturing a new version of the support chip which will resolve the issue. The Sandy Bridge microprocessor is unaffected and no other products are affected by this issue. The company expects to begin delivering the updated version of the chipset to customers in late February and expects full volume recovery in April.

Intel said the problem it had with the chip design would not affect total 2011 sales although gross profit margin for the year would be down slightly. The company said it would take a hit on gross margin for the fourth quarter of 2010 “by approximately 4 percentage points from the previously reported 67.5 percent.”

Read Intel's complete statement on the subject here.

16 comments on “Intel to Take $700M Hit on Flawed Chip Design

  1. Himanshugupta
    January 31, 2011

    700m USD is a lot of money but i think there will not be much of a PR issue atleast. The worst did not start. I do not know how they detected this error but it must have been a hell lot of operation to pinpoint the defect. I wonder what happended to the team who detected the error? Got promoted or fired!

  2. Himanshugupta
    January 31, 2011

    700m USD is a lot of money but i think there will not be much of a PR issue atleast. The worst did not start. I do not know how they detected this error but it must have been a hell lot of operation to pinpoint the defect. I wonder what happended to the team who detected the error? Got promoted or fired!

  3. Clairvoyant
    January 31, 2011

    Yes, it would definitely be interesting to know what the problem is. I don't think this issue will affect Intel much. They will just continue on towards the future.

  4. Anna Young
    January 31, 2011

    Few companies can announce they'll get hammered to the tune of $700 million for making a design mistake and feel it only in their gross profit margin. The design mistake raises several questions: how did Intel miss this problem for so long; who was responsible; what is the penalty to the people responsible and how will Intel ensure this does not happen again? Let's hope Intel offers answers to these questions.

  5. seel225
    January 31, 2011

    This is not the first time intel had a design problem,In the past Pentium chip and AMD had a couple of problems too that forced recalls.This time it costs bit high amount for the company to solve the issue but i think it is not going to effect much on Intel stocks.




  6. Tony Massimini
    February 1, 2011

    A little more detail on this issue.  I have spoken with some people at Intel.


    There were some early problems reported from the first Sandy Bridge systems that were shipped. Not many. But intel takes everything seriously. Investigation revealed the problem is with one transistor in the SATA port. An Intel reliability test lab ran it through an accelerated life test. Intel determined that there was a high probaibility that this transistor could deteriorate or even fail within about 2 to 3 years.

    Keep in mind that this is the SATA port of the old standard. Rather than leave things alone and assume that hardly anyone would use an old SATA drive with a Sandy Bridge, The company acted very quickly.

    Does anyone remember the infamous Pentium FPU bug of 1994? The Pentium was still ramping up. It was discovered that within a certain range the accuracy of the FPU was only good to about 5 decimal places, instead of a much higher level of accuracy. Intel treated it lightly. Acting like engineers, “hey that accuracy is good enough for just about anything,” Intel just waved it off. They caught a lot of heat from customers. Intel quickly realized that PCs are consumer products and there are differenct expectations. Intel paid a heavy price in 1994. But the company also lay down the gauntlet for all other chip vendors as far as maintaining a company's image and reputation for quality. Other chip vendors have had to recall devices as well.

    Sandy Bridge is still in its early ramp up phase. Systems started shipping in early January 2011.  The fix is in the next to last metal layer. There are wafers in process that are not yet at this point, So these are still good with the revised metal layer. Intel's rollout will be delayed a few weeks. The numbers are still relatively low and it is early in the year when PC sales are historically low. There is plenty of time to catchup. The dollar figures stated are a worst case scenario. Yes, $700 million is a lot of money. But Intel does alot of volume and works with large numbers. The company's revenue in 4q 2010 were $11.5 billion.

    Intel has taken an aggressive approach to maintain its overall quality and image.



  7. t.alex
    February 1, 2011

    Intel is refunding some of the OEMs, such as Samsung which is recalling some notebook models running on this Intel processor. This is a huge and costly mistake.

  8. bolaji ojo
    February 1, 2011

    Tony, Thank you for the historical perspective. As you noted, Intel has become more aggressive in recent years and months with actions to burnish its reputation and fix problems either in its relationship with regulators or with companies like AMD and Nvidia.

    I wonder though if you can clarify why the design flaw was only identified after production and not before. I imagine various tests were done over months. How did such a problem evade diagnosis and what do you think the company has in plan to avoid a future occurrence? Good to hear from you as usual.

  9. Anand
    February 1, 2011

    $700m is huge but again its nothing compared to brand Intel. As Tony pointed out in his previous comments Intel has suffered a lot in infamous Pentium FPU bug.  I guess Intel has learnt lesson from this FPU bug and hence didnt want to take risk this time around, thought the bug seems to small.

  10. Tony Massimini
    February 1, 2011



    Chip design is very complicated,  In a previous lifetime I was an applications engineer working on PC chipsets.  Over twenty years ago and even today I doubt there is a perfect chip set.  All chip sets have an erratta list.  If an erratta is a show stopper, you fix it before going to production.  Otherwise there are work arounds so you can go to production.  These could involve board layout or SW fixes.

    Some problems do not crop up until you go into volume production and customers put the product through its paces.  Remember that when you look at a datasheet there are min-max specs.  These are due to variances in manufacturing.  The goal is to stay within these specs.  I have seen where prototypes work fine in a test system.  Then you start getting wider spreads in full production and problems crop up.

    Find problems and fixing them is a never ending job in this business.  The main point is how will a company handle these problems.  In this case, as soon as Intel heard about a problem, regardless of how small it may have seemed at the time, they took nothing for granted and dove into it.  Better to catch it early than after you have been in volume production for a year or more.

  11. bolaji ojo
    February 1, 2011

    Tony, Again, thanks for shedding more light on what is obviously a difficult subject. Could you address some of these technological and supply chain challenges in your next blog? I believe this is the one area where EBN readers can benefit from your experience and also suggestions on how to deal with situations like this in their manufacturing operation.

  12. Mydesign
    February 2, 2011

        Bolaji, see how a small or minor negligence in design and testing part cost Intel, a loss of nearly $700 Million. This loss showing an insight about, how much one should careful, about designing and verification process, before anything going to the production mode. Luckily Intel had traced the fault before shipping and saved their face in the competitive market. Otherwise recalling the damaged chips and replacement may cause more burdens for them. Intel is a multi billionaire company and they are capable for afford loses up to a certain extend. Moreover, if once some black or bad mark comes for a brand, it affects the future marketing and share value too.

  13. DataCrunch
    February 2, 2011

    Intel has been the leader in the chip industry for as long as I can remember and continues to spend billions on R&D to continue its leadership position.  Things like this will continue to happen, especially as the technology expands exponentially.  As Moore’s Law  (based on Intel’s co-founder Gordon Moore) states that the number of transistors on a chip will double every two years.  And this law has pretty much geld true for over 40 years.  At some point in the near future (5-10 years) Moore’s Law will evolve and the industry will have to move beyond the conventional CMOS chip technology, like muti-dimensional and nanotechnology chip technology and who knows what else. 

    For sure Intel will be at the forefront on these new innovations and with 100% certainty there will continue to be flaws that are found and fixed.

  14. Tony Massimini
    February 2, 2011


    Just to show how much Intel has become a part of the pop culture landscape, here is the latest on The Onion website (satirical comedy)

    American Voices: Intel Ships Flawed Chip


    What other chip vendor has established such a position in the minds of the general public?

  15. stochastic excursion
    February 3, 2011

    I noticed that the press release refers to the product having the issue as a “support chip”.  Does the fact that this is not their flagship microprocessor mean there has been cutting of corners in the design process?  True, this year's cost hit is only 4% of the year's profits, but it adds up to a large percentage of the $3.6 billion in R&D and MG&A spending.

    I'm curious about Intel's purchase of McAfee, the makers of security software.  How would that fit in with their long-term growth strategy?

  16. bolaji ojo
    February 3, 2011

    I don't believe the fact that this was not the main microprocessor is the reason behind this problem. Who wants $700 million as the cost of not paying enough attention? As others have said here, this was a problem that was not that unusual but the cost is obviously enormous and it's difficult for Intel to defend this especially since OEM customers were negatively impacted.

    The McAfee acquisition enables Intel to take security to another level in its operations. This is another addition to the company's offering and I think it offers Intel the opportunity to integrate software security into its products. I am equally looking forward to how it plans to do this and the effect on customers.

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