Although the consumer PC market is shrinking and will continue to shrink in the coming quarters, Intel is confident that the overwhelming demand from the AI industry for everything that can compute or store data will offset declines in the client space. To that end, the company is reallocating some of its capacity from client to data center CPUs, expanding its Fab 24 in Ireland to make more Xeons, has begun equipment installation into Fab 62 in Arizona ahead of schedule and vows to make 18A chips there, and is expanding its advanced packaging capacity in New Mexico and Malaysia.Go deeper with TH Premium: CPU(Image credit: Tom's Hardware)Intel VP Robert Hallock sets Nova Lake expectations, teases return to Raptor Lake for DDR4 platformsCPU scaling with DLSSIntel's one-two punch plan in desktop CPUs is taking shapeBenchmarking AMD's BC-250, offering Steam Machine-like performance at half the priceAMD splits Zen 7 into three EPYC families for 2028 and starts selling server CPUs by the agent "The industry continues to navigate one of the most significant supply shortages in history, driven by the unprecedented demand for Super Intelligence," said Lip-Bu Tan, chief executive of Intel, during the company's earnings call. "Against this backdrop, I am pleased by the progress we made growing our server supply in Q3. I am mindful about the ongoing challenges we face in the future quarters to keep pace with server demand."More Intel 3-based XeonsIntel's manufacturing expansion comes as demand for server processors continues to exceed supply despite substantial production increases over the next several quarters. The company's Data Center and AI (DCAI) business generated $7.3 billion in revenue in the third quarter of 2026, up 17% sequentially and nearly 80% year-over-year. Intel expects demand for data center CPUs to remain strong in 2027 – 2028 as AI infrastructure operators deploy more CPU-intensive agentic and inference workloads.To meet demand for Xeon CPUs in the coming years, one of Intel's immediate priorities is to increase output of Xeon 6 'Granite Rapids' processors, which are made using its Intel 3 process technology. The company recently began expanding production capacity at its Fab 24 manufacturing complex near Leixlip, Ireland, but this capacity will only come online by the end of 2027, unless the move can be accelerated.To further increase its Intel 3 capacity, Intel plans to convert some manufacturing resources at its Oregon facilities from Intel 18A to Intel 3. These resources were originally intended to manufacture Panther Lake client processors, but weaker PC demand has allowed Intel to prioritize higher-demand data center products. The company expects the additional Intel 3 capacity in Oregon to enter production in the second half of 2027."What we are taking offline to put Intel 3 into Oregon is 18A wafers, which we are generally going to build Panther Lake products," said Dave Zinsner, chief financial officer of Intel. "We see the opportunity with some of that capacity freed up to go produce more data center wafers."Granite Rapids has already become Intel's fastest ramping server processor family, but demand continues to exceed available supply, according to the company's management. Intel is also improving manufacturing yields and reducing production cycle times to extract more usable processors from its existing capacity. According to the company, Intel 3 manufacturing costs have declined by approximately 15% since the first quarter of 2026.Prepping for Diamond Rapids, Nova LakeIntel is also accelerating the expansion of its leading-edge manufacturing operations in Arizona. The company is ramping Intel 18A production at Fab 52 and is accelerating equipment installation into the adjacent Fab 62, which is set to become the company's second high-volume manufacturing facility for 18A, 18A-P, and derivative process technologies. These investments will support future Intel 18A/18A-P-based products, including server CPUs, although the company has not disclosed the precise allocation of manufacturing capacity between client and data center products at the facility. While the latter is natural, Intel said during the conference call that it expects to win some market share in the client space with its Core Ultra 400-series 'Nova Lake' CPUs, which will require the company to produce these parts in high volumes. To support its capacity expansion, Intel aggressively procured new tools in the third quarter. Not only wafersWhile expanding production of Intel 3 and Intel 18A/18A-P wafers is a must to increase output of data center CPUs, producing more wafers will not necessarily solve Intel's supply problems. The company also faces shortages of advanced organic substrates required to package its multi-chiplet processors (or rather system-in-packages, or SiPs?) that rely on EMIB and/or Foveros 3D packaging technologies. Intel has been working with substrate suppliers to expand their production capacity and expects approximately 40% additional substrate capacity to become available in the second half of 2027."We are not only constrained on the wafer side, we are also constrained on the substrate side," Zinsner said. "So, it is important we get the substrate piece of this ramped up to be able to meet the demand."In addition, Intel is expanding its advanced packaging operations in New Mexico and Malaysia to support growing demand from internal product groups and external customers. The company already uses its EMIB technology to connect multiple compute dies in Granite Rapids processors, while its newer Clearwater Forest Xeons combine EMIB with Foveros Direct 3D and hybrid bonding to stack Intel 18A compute dies on Intel 3 base dies. Additional packaging capacity will be essential as Intel increases production of these processors and introduces more complex multi-die products as well as assembles advanced system-in-packages using EMIB, EMIB-T, Foveros 3D, and other technologies for external clients."On Advanced Packaging, we are pleased by the progress we are making with EMIB and EMIB-T for our internal products," Tan said. "Both continue to see significant external customer traction as well. We continue to improve on execution, working with our supply chain to secure the capacity to meet the needs of our Advanced Packaging customers. We are also seeing robust progress in the readiness of Hybrid Bonding Interconnect (HBI), which is an enabler of 3D chip stacking for our upcoming server products."Capital neededIntel's expansions will require substantial capital. Intel expects its capital expenditure (CapEx) budget to reach approximately $20 billion in 2026 and increase significantly in 2027 (though it did not reveal any firm numbers). The company said firm purchase orders to semiconductor equipment suppliers increased by nearly 40% sequentially as it secured tools for its manufacturing expansion. Intel is also evaluating opportunities to accelerate construction of its semiconductor manufacturing complex in Ohio, where the first major structural truss was recently installed. "We have made good progress securing the equipment required to support our growth plans with firm purchase orders to equipment suppliers increasing nearly 40% sequentially," Zinsner said. "We are also accelerating clean room build-outs, including Fab 62 in Arizona and exploring opportunities to accelerate in Ohio.Yet Intel's capacity expansion will take time to produce results. New equipment must be installed and qualified, additional wafers must pass through lengthy manufacturing cycles, and substrate suppliers must increase their output (which will likely require them to procure new tools and install them) before Intel can ship more finished processors. Consequently, the company expects supply constraints to remain particularly severe during the first half of 2027, even as the client PC market is set to continue contracting. Nevertheless, Intel expects its data center business to continue growing and believes that additional manufacturing capacity, higher yields, and improved substrate availability will enable it to capitalize on demand for AI infrastructure in the second half of 2027 and beyond.