Earlier the company halted investments in France and Italy and there are also delays in construction of new plants in Israel.
On top of that, an Intel plant in Ohio plant that was supposed to be operational by 2025 on the back of $20 billion in investment has so far received just 1$1.5 billion and will be operational "between 2027 and 2028."
Intel - a one of a kind business…
Traditionally, Intel has operated as a vertically integrated company that designs its products, manages the supply chain, and ensures their production. It used to be the leader in new technology of chip manufacturing, as the company solidified its top position on the CPU market in the 1990s, with the release of Pentium processors. But Intel’s manufacturing fell behind the competition, making mistakes that enabled the rise to dominance of Taiwan Semiconductor Manufacturing Company Limited (TSMC) in the foundry business. Right now most companies run ‘fabless’ business models, whereby manufacturing is outsourced to foundries.
TSMC’s market share of semiconductor manufacturing is around 60% and when it comes to the top-of-the-line products it is even greater. While Intel was focused on producing chips to ultimately build optimal processors, as a finished product in a vertically integrated business, TSMC perfected only one stage of this process - chip manufacturing. Unfortunately this made Intel both too narrowly and too broadly focused at the same time - too broadly on developing the whole product, but too narrowly by working only on solutions applicable for the markets Intel finished products competed in.
… with one-of-a-kind problems
So, you probably don't have an Intel chip in your phone. While Samsung makes its own chips for phones the biggest players in this niche, Qualcomm, MediaTec and Apple, own more than 80% of the market and rely mainly on TSMC to manufacture their designs. Intel slept through the mobile revolution and now demand for phone processors far exceeds demand for CPUs for PC and servers.
Intel is also late to the AI revolution. The main manufacturers of graphics processing units (GPUs) are NVIDIA and AMD. They design chips produced mainly by - again - TSMC. Unfortunately for Intel, GPUs experienced a boom thanks to cryptocurrencies, which used them for mining, leading to unprecedented demand. Then ChatGPT saw the light of day, and the whole world became even hungrier for raw computing power. Before the Bitcoin mining craze (2015), Intel had a market capitalization about 10 times that of NVIDIA. After another cryptocurrency boom and the advent of artificial intelligence, NVIDIA is worth about 30 times more than Intel, which has fallen behind all the companies I've mentioned so far.
Not only has Intel missed some big opportunities, but it also suffers from problems in its core market. For example, Apple in 2020 switched from Intel processors to producing its own with chips made by, yes you guessed it, TSMC. While Intel's position as a CPU manufacturer is still dominant, AMD is slowly but steadily gaining ground - in 2016 Intel had 82% of the market share, now it has dropped to 63.5%. Recent problems with Intel's latest series of high-end processors will not help to reverse this trend.
The American giant is trying to counter all these problems. It has more or less patched the technology gap between its chips and TSMC's. The battle for the title of the best next-generation chip continues, but no one denies that Intel is a competitor in this race. The company has also taken a huge step into the TSMC market by opening its foundry business to outside customers in direct competition for orders from major chip designers such as Apple, NVIDIA and Qualcom, but this branch of the business is not yet well developed. Intel’s chips dedicated to supporting AI solutions premiered on September 24 but whether they will be successful remains to be seen.
On the financial side Intel reported revenue of $12.8 billion in the second quarter of 2024 which is unimpressive, considering the revenue for Q2 2021 was $19 billion and profit was reaching $5.1 billion, while presently Intel operates at a loss of $1.6 billion. Along with halting investments Intel decided on mass layoffs, cutting more than 15% of its employees and suspending dividend payments. This is reflected in Intel's share price which has fallen this year by more than 60% and is only beginning to stabilize. The situation is so difficult that Wall Street is ripe with rumors about business splits and potential takeovers. Why Intel matters to the EU…
From a European perspective, the key role of semiconductors became clear in the second half of 2020, when supply chains broke due to the pandemic. At the same time, demand for chips increased as entire economies shifted to a remote work model. This proved to the EU that it can't always rely on supplies from Asia - much of the industry simply had to stop production as it ran out of dedicated semiconductors.
The EU's response to semiconductor dependency is the “European Chips Act,” which aims to strengthen the region's semiconductor ecosystem. Proposed in early 2022, the act sets an ambitious goal of increasing the EU's share of global semiconductor production to 20% by 2030. This figure is particularly significant given that in 2020 the EU accounted for just 10% of global semiconductor production capacity.
Intel's new factories, open in its new model of accepting orders from third-party chip designers, were to be an important part of this strategy. Intel negotiated good terms for its expansion, for example in the Polish case Intel was to invest $4.6 billion, while state aid was to hit $1.5 billion.
The EU is in a rather peculiar situation in which, although it is home to the Dutch ASML, a world leader in manufacturing machines used to make advanced chips, it has no indigenous semiconductor manufacturer. As a result, it has to solicit investment from foreign capital and as already described, this is not a wide market. Fortunately TSMCs investments in Germany are so far without major delays. However, Europe needs to catch up and cannot afford to lose key players like Intel.
… and to the US
Although the States have their own domestic chipmakers and robust supply chains with TSMC, they too have been made aware by the global chip shortage during the pandemic that they are at risk. It is important to keep in mind that much of the competitive advantage of the US giants is due to their focus on new technologies.
Therefore, the States signed into law in 2022 the CHIPS and Science Act, a sizable piece of legislation designed to boost the domestic semiconductor industry. The US has been able to successfully advocate for the construction of TSMC factories on US soil and, as an incentive, subsidize them with $6.6 billion in grants and $5 billion in loans. Still, the biggest beneficiary of the new legislation is Intel. It received $8.5 billion in grants plus $11 billion in loans to expand its production capacity. However, the problems I have described are so acute for the company that even such funding may not be enough, and there are reports from overseas of further delays in the completion of the investments.
For the U.S., in addition to maintaining competitiveness, semiconductors have another importance. Strategic. The modern military is as dependent on them as business is, and interference by a hostile state with defense technology at this level could have disastrous consequences. Given the prevalence of chips in armaments, this is a threat like no other. That's why, despite all Intel's problems, it was announced on September 16 that it had signed a $3.5 billion contract with the Pentagon for chip supplies.
The future of Intel
In my opinion, Intel's problems are temporary, because it is simply too big to fail. After the pandemic chip shortages, it became clear to everyone in the world that chips are a strategic resource. The US is trying to cut China off from them to maintain technological supremacy, to which China is responding with gigantic efforts to acquire the technology on its own. All Western economies are racing to convince leaders in the industry to open factories on their soil, by any means necessary. That's why Intel may be taken over by another American company or restructured or even rebranded, but there is no scenario in which it is liquidated.
Intel's official announcement on Poland said: “We will pause our projects in Poland and Germany by approximately two years based on anticipated market demand.” While wondering how realistic it is to resume these investments, one should not worry about demand, as it is, and will remain, massive. Geopolitics will have more to say in this regard. Poland was ranked as the best country in Europe for such investments as Intel's, according to Kearney’s Back-End Semiconductor Manufacturing Attractiveness Index. I’m sure that Intel's factories in Europe will be built, but it seems clear that in the current circumstances not all investments can be continued at the same time. Since, in my opinion, it is the dollar and not the euro that will be pumped into Intel to keep it afloat, European factories will be built, but no sooner the American ones are up and running.
