The worst nightmare of any worker is perhaps having a horrible boss: ａspineless one does nothing to drive growth in the company, or in its employees’ salaries; equally, an egotistical one is no better if he feels he is too good for any advice coming from his subordinates.
As for investors over the course of stock picking, much like all company workers, we think identifying the right CEO is just as important as putting the capital in the right industry. Granted, even the greatest CEO will find his hands tied in an industry subject to a particularly difficult operating environment, which diminishes the effect of whatever business strategies that have been put into place. The global banking industry, for example, has not only been under much tighter supervision since the 2008 financial turmoil, it has also struggled with ultra-low interest rates, which put a dent in their profitability. Under such circumstances, these institutions’ heads could probably do no more than ease the hardship their companies have been confronting with.
But in the tech field, the differences between good and horrible bosses are much more pronounced. The reason being, with the rapid advent of technologies, just a couple of slip-ups will cost a company years for it to be able to catch up with its competitors again. Intel’s Brian Krzanich, a.k.a. BK, is perhaps one of the most relevant examples.
In the high-tech space, the upside to being a larger player is that, the more profit it makes, the better placed it is to allocate more resources to research and development, and explore new product lines and technologies, thereby maintaining its leading edge, while making it difficult for successors to catch up. This explains why Intel was – for a long time – the leader in the semiconductor industry, where it once commanded the largest market capitalization. But its lead in the semiconductor space was overtaken last year and the year before that, once by Nvidia and again by TSMC respectively. So, how did Intel lose its grip on semiconductor production? What lessons can investors learn from its descent?
Some attribute Intel’s pain points to its IDM business model. IDM, Integrated Device Manufacturer, is a business model in which a company straddles both semiconductor design and manufacturing. Intel operates differently from its peers in this respect. TSMC, for example, only makes chips without being involved in designing them. But such an argument can hardly explain why, just a few years ago, Intel’s scale and manufacturing technology were still ahead of TSMC. If it had been an issue with its business model, Intel would have lost to the Taiwanese company long ago.
The crux of the issue might have been its CEO.
The biggest challenge for semiconductor foundries is keeping the production yield high throughout the entire manufacturing process, which can easily run to hundreds of steps. Even if that of each step reaches 99.9%, half of the overall output may still turn out to be defective. Only when 99.99% of the units coming out of each step pass relevant quality checks, can we consider the production line efficient. But given that the crystals in a chip may just be a few nanometers apart – amounting to just one ten-thousandth of the width of a human hair – the efforts it requires to sustain a high production yield in each ultra-high-precision step are simply unimaginable.
Hence every single employee in the entire company must ensure seamless collaboration to make this goal a reality: resources have to be directed to where an issue arises, immediately. In Intel’s case, former employees have spoken of BK as being egotistical, and his management style tyrannical. He was said to dislike communicating with employees, in addition to having the habit of humiliating them in public. He was also said to have turned a blind eye to warnings from his employees that there might have been issues with Intel’s 10-nanometer production, which led to his failure in deploying a timely solution. A sense of being underappreciated also led to an exodus of staff members in Intel. BK had to step down eventually in 2018, with the position succeeded by Intel’s Chief Financial Officer, Bob Swan.
As a company welcomes its new CEO, it’ll also likely herald a turning point in its performance. For example, under the reign of Steven Ballmer, Microsoft’s stock price had stood strong for many years, but since the appointment of Satya Nadella in 2014, its share price has risen sevenfold. At the beginning of this year, Intel brought on board company veteran Patrick Gelsinger, a.k.a. PG, as CEO. Having been with Intel for three decades, doubtless PG knows its success story like the back of his hand; but what is yet to be known is whether he will steer Intel back on track to see its heyday again.
 Source: Companiesmarketcap.com, as of Oct 2021
 Source: Google Finance, as of Oct 2021
This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.
Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.
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