A billion-dollar mistake: Intel recalls a supporting chip for popular Sandy Bridge platform

Intel made a big deal at the recent Consumer Electronics Show about how its Sandy Bridge combination graphics-microprocessor chip has been one of its most successful in history. But it spoke too soon. Now the world’s biggest chip maker said it has discovered a design flaw in the chip’s companion chip set, forcing a production delay that will cost it $1 billion in lost revenues and replacement costs.

The delay could derail the shipment schedules for more than 500 computers using the Sandy Bridge processor, which combines graphics and a microprocessor in a single piece of silicon. That’s going to be bad for the PC industry, since Intel can’t supply millions of new chips overnight. That could give an advantage to rival Advanced Micro Devices, which is shipping a rival combo processor under the Fusion platform name.

Intel said it will reduce its revenue target for the first quarter by $300 million and incur repair and replacement costs of $700 million. That’s the biggest quality problem since the Pentium bug hit Intel in 1994, when Intel recalled a math-flawed processor at a cost of $400 million. It’s a big black eye for Intel CEO Paul Otellini, pictured, but in all likelihood, this sounds like a mistake that one or two engineers made in designing a small part of a very big chip.

The tough part for Intel is that it can’t fix the chip with a simple software update. It has to remake the chips in its factories, and that causes a delay of weeks for computer makers who want to ship their machines now. Since Intel won more than 500 designs for Sandy Bridge, the delay could affect sales for the entire PC industry.

Intel said it discovered the flaw in the recently released support chip, code-named Cougar Point, and has had to redesign the silicon. That could mean a delay of 12 weeks (the typical time it takes to get a chip through a factory) in getting corrected chip sets to customers. Cougar Point had flaws in its Serial ATA (SATA) ports, which means that SATA-linked devices such as hard drives and DVD drives might not work properly over time. Cougar Point is a companion chip set for Sandy Bridge, which itself was not affected by any design problem.

Intel said it expects to deliver the updated version of the chip set to customers in late February and expects a full recovery of production volumes by April. The company said it would accept the return of the Cougar Point chip sets. The systems with the bad chips have been shipping since January 9 and there are relatively few consumers who already have flawed systems in their hands. The potentially affected consumers are those who bought second-generation Core i5 and Core i7 quad-core systems.

For the fourth quarter of 2010, Intel will take a charge against earnings related to chips shipped during that quarter, reducing the expected gross margin percentage by 4 points from the previously reported 67.5 percent. The company will also take a charge in the first quarter, reducing gross margin percentage by 2 percentage points and the full year by 1 percentage point.

Separately, Intel said it recently completed the acquisition of Infineon Technologies’ Wireless Solutions business. And it expects to complete the $7.6 billion acquisition of McAfee by the end of the first quarter. For the first quarter, Intel now expects revenue of $11.7 billion, plus or minus $400 million, compared to the previous expectation of $11.5 billion, plus or minus $400 million. Yes, that’s actually higher than previously expected, since the market is better than it was in the last forecast. But gross margin percentage is now expected to be 61 percent, compared to the previous expectation of 64 percent.

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