Even an $8.5 billion government windfall couldn’t save Intel

Over the last 20 years or so, Taiwan Semiconductor (TSMC) has become the global leader in chip manufacturing, now controlling roughly 60% of the semiconductor foundry market. Foundries are 3rd-party chip manufacturers. Companies like AMD, Nvidia, and Apple design their chips in the US, but they rely on TSMC to manufacture their most-advanced semiconductors in its foundries in Taiwan. The reason for this is two-fold:

1. Chip manufacturing is a capital–intensive business, and many companies prefer to outsource this process vs. scaling their own production.

2. TSMC has the world’s most advanced manufacturing capabilities, currently producing 3-nanometer (nm) chips. (For context, Intel’s most-advanced mass-production chip is still 7nm).

The problem with TSMC dominating the chip manufacturing industry is that it presents heightened geopolitical risks for the US. TSMC is, as the name suggests, located in Taiwan. China’s ongoing conflict with Taiwan risks supply chain disruptions that could have ripple effects in the US economy, as most of our most-advanced chips are manufactured in Taiwan. 

On March 20, 2024, to address the risk of outsourcing manufacturing of our most advanced chips to Taiwan, the US government committed up to $8.5 billion (along with $11 billion in loans) to Intel, through the CHIPS and Science Act to support construction and expansion of Intel facilities in Arizona, Ohio, New Mexico, and Oregon.

The goal with the investment was to expand US domestic chip-manufacturing capabilities, not just for Intel, but for the broader chip market. The US government wants a competitive foundry on its home turf. Last summer, Intel separated its “foundry” business’s financials from the rest of the company, making it an independent operating unit, and at the IFS Direct Connect Conference in February 2024, Intel’s CEO Pat Gelsinger noted that he wanted Intel’s foundry business to eventually produce chips for Nvidia, Qualcomm, Google, Microsoft, and even AMD. 

So, how is Intel’s foundry business doing with that additional $8.5 billion in funding?

Not great!

Intel reported lackluster earnings last week, with a 1% decline in year-over-year revenue and a $1.61 billion operating loss, including a $2.8 billion loss stemming from its Foundry unit that generated $4.3 billion in revenue (4% year over year growth). Even worse, the company stated that it was slashing 17,500 jobs and suspending its dividend just five months after announcing that the CHIPS Act funding would create almost 30,000 jobs.

Management noted that investments in Intel Foundry would continue weighing on operating profits through 2024, but the business would reach breakeven soon-after. However, investors have grown tired of Intel’s pattern of missed deadlines, especially after the company already pushed back the initial timeline for its new Ohio factory from 2025 to late 2026 amid “market challenges,” and the stock fell by 29% on Friday morning, in its biggest decline since 1974.

Maybe Intel’s heavy spending will pay off, but for now, investors certainly aren’t pleased. Plus, it’s never a good sign when your CEO’s response to the sharpest stock sell off in decades is quoting Old Testament Proverbs: