September 5, 2023
The ambitious U.S. strategy to revitalize its semiconductor industry has faced a significant setback as Intel Corporation, once a key pillar of the plan, now struggles with deteriorating financial conditions. President Joe Biden’s administration had placed high hopes on Intel to lead the resurgence of U.S. chip manufacturing. However, the mounting financial challenges at Intel pose serious questions about the success of this strategic initiative, potentially marking a major setback for the country’s most ambitious industrial policy.
In a pivotal moment, President Biden joined Intel CEO Pat Gelsinger to announce a $20 billion subsidy package in Arizona, five months ago. Yet, as Intel’s ability to secure this funding becomes increasingly uncertain, the future of this subsidy plan hangs in the balance. Moreover, Intel’s challenges could jeopardize the U.S. government’s critical policy goals of establishing a secure and advanced chip supply chain for the Department of Defense (DoD) and aiming for 20% of the world’s advanced processor production by 2030 to be made in the U.S.
Intel faces more severe than anticipated sales declines and cash flow crises, compelling the company’s executives to consider drastic measures, including the possibility of divesting its manufacturing sector or scaling back its global factory expansion plans. At a time when Intel desperately needs government support, these changes might complicate its process of accessing the funds.
Under the 2022 ‘Chips and Science Act’, Intel was set to receive $85 billion in grants and $110 billion in loans, contingent on meeting certain milestones and undergoing rigorous due diligence. This process was designed to be consistent for all applicants to ensure taxpayer funds were directed to companies that would deliver on their commitments. However, no funds have been distributed to any potential beneficiaries, including Intel, thus far.
Intel has expressed frustration with the government’s delays in disbursing funds and has urged for a swifter process. However, Intel has reportedly refused to provide certain information requested by government officials, which is needed to assess the feasibility of its manufacturing plans.
The Department of Commerce, which oversees the distribution of funds under the ‘Chips Act’, has remained silent on the specifics of the negotiations. Intel, in a statement, has highlighted the significant progress made at its facilities in Arizona, New Mexico, Ohio, and Oregon, and expressed the anticipation of finalizing funding agreements.
Intel’s financial report on August 1st showed unexpected losses and a bleak outlook, putting immense pressure on the company. The stock price suffered one of its steepest declines in decades following the earnings release, and two major credit rating agencies downgraded its debt rating to near ‘junk’ status. Additionally, Intel announced plans to lay off approximately 15,000 employees, a worrying signal for a company that was supposed to help bolster the U.S.’s semiconductor workforce.
Continuing to address these issues, we recognize the need for flexibility and efficiency in our operations, as all companies in the industry do, Pat Gelsinger stated during an investor meeting last week.
Intel is expected to review its next steps at its board meeting in mid-September. If the company decides to reduce the scale of its U.S. projects, the subsidies it receives are likely to change significantly.
The tumult within Intel could turn this landmark public-private partnership into a political liability. In March, President Biden announced that Intel would be the largest beneficiary of the ‘Chips Act’ funds, which total $39 billion for domestic critical component manufacturing, along with hundreds of billions of dollars in loans and tax breaks.
Not only did Intel receive a quarter of the private sector’s funding commitment, it was also the exclusive recipient of a $3.5 billion grant for defense and intelligence chip manufacturing projects. Intel’s factory plans are critical to the execution of the entire ‘Chips Act’.
However, Intel’s expansion pace will be determined by market demand rather than political commitments. Gelsinger has stated that the company’s current strategy is to first expand its factory infrastructure and then scale up more expensive equipment based on clear market demand.
For example, then-President Barack Obama announced in 2012 that Intel would launch a project in its Arizona factory the following year. However, Intel delayed the project’s start until 2020, when it fully operated. In 2021, Intel announced further expansions at its Arizona factory.
Commerce Department’s Chips Office Director Mike Schmidt acknowledged the high volatility and intense competition in the semiconductor industry, stating that they must adapt to changes.
Referring to Intel, Schmidt added, We are satisfied with Intel’s expansion plan and the milestones set in our preliminary agreement, which were personally announced by President Biden in March.
Intel is reportedly aiming to complete the transaction and receive the first installment of funds as soon as possible. In early negotiations, the company emphasized its substantial investments and the sufficient assurance provided for its roadmap.
However, Intel still faces challenges in demonstrating the strength of its products, given the widespread recognition of competitors like TSMC and Samsung. The company has noted that several firms, including Broadcom, MediaTek, and Microsoft, are considering using its fabrication services, but no major production has started.
According to sources, Intel has been actively promoting its capabilities to executives at Nvidia and AMD, suggesting that the company’s large factory in Ohio could become one of the largest chip manufacturing facilities globally. However, both companies have no current plans to utilize Intel’s services.
Nvidia relies on TSMC and Samsung to meet its production needs, but the company is currently in the early stages of evaluating Intel as a potential supplier. AMD CEO Lisa Su has avoided commenting on whether the company is considering using Intel’s fabrication services and has expressed satisfaction with its current main supplier, TSMC.
In addition to Ohio, the funds from the ‘Chips Act’ that Intel received will also support projects in Oregon, New Mexico, and Arizona. Intel’s Arizona factory is not only its manufacturing hub in the U.S., but it also supports the Department of Defense’s Secure Enclave chip program, which aims to build a trusted foundry network to produce non-advanced chips for national security.
Economically, this is a challenging task. According to the latest report from the National Academy of Sciences, existing trusted foundries must incur substantial operational costs to meet the Department of Defense’s requirements. However, the DoD’s procurement often does not provide sufficient returns on investment for these suppliers.
Researchers have suggested that the DoD should relax procurement standards to better integrate into the supply chain established by the ‘Chips Act’. In other words, the military could consider purchasing advanced chips from foreign companies’ U.S. factories, such as TSMC and Samsung. Although this remains a challenging issue for all parties involved, some DoD officials have begun preliminary discussions on alternative solutions.
This poses a difficult problem for all participants, especially following the DoD’s cancellation of a planned arrangement in February, which would have had the DoD cover 25 billion dollars of the Secure Enclave project’s costs, with the Commerce Department covering the rest. The cancellation led Congress to instruct the Commerce Department to fully fund the project and include some of the added responsibilities in Intel’s $85 billion subsidy package.
This means that a portion of Intel’s funding will be tied to strict conditions related to the defense project, although the situation is still evolving. Intel, the Commerce Department, and the DoD have not publicly responded to these developments.
Furthermore, the Commerce Department has been forced to cancel a program aimed at supporting commercial research and development. As a result, the department rejected Applied Materials’ application for funding for a critical project in Silicon Valley. In an attempt to revive this program, the department sought an additional $3 billion in funding under the ‘Chips Act’, but this proposal has faced opposition in Congress.
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