The capital and technology requirements to remain a global leader in the semiconductor industry are becoming extreme. Just how extreme was evident from two announcements at Intel this week. They show how deeply the company is adapting its traditional way of doing business as it tries to regain its lost technological edge and ensure that the United States is home to at least one world-leading chipmaker. .
The first announcement was that it was selling a 49% stake in two new manufacturing plants under development in Arizona to private equity firm Brookfield. This is a whole new way to fund fabs as the cost of building the most advanced facilities skyrockets. Brookfield’s deal covers the first $30 billion invested in Arizona, while Intel has valued long-term investment in its new factories like the one it’s building in Germany at more than $100 billion each.
The deal is a byproduct of Intel’s decision to stand firm on chipmaking, even as it struggles to regain the lead it lost to TSMC and Samsung in the latest process technology. .
Most other chipmakers have chosen a different path. Rival AMD threw in the towel a decade ago, quitting manufacturing to focus on design. This decision to specialize – while outsourcing manufacturing – began to pay off, as AMD’s latest designs dented Intel’s dominance in the market for x86 chips used in most PCs and servers.
The vast scale at which the latest chip fabs operate will likely exceed the needs generated by Intel’s internal chip design activity. This has meant entering the foundry market – making chips for other companies – to absorb the extra capacity.
The resulting capital intensity is staggering. Over the past decade, Intel’s capital expenditures have averaged about 20% of its annual revenue. Going forward, he expects that figure to rise to 25% – and that’s before adding new sources of funding like government grants and co-investment deals like the Brookfield deal. Overall, Intel said it could boost capital expenditures to more than 35% of annual sales.
Exactly how the risks and rewards of the new financing arrangement are shared has not been disclosed. But Intel hinted at the protections it offered, such as guaranteeing Brookfield a certain level of production at its new factories, and said the investment firm would get a relatively fixed return on its $49 stake. %, with some variability. In return for a higher cost of funding than a straightforward loan deal, Intel believes it will retain most of the upside if the factory outperforms, meaning it will also retain most of the risk if that it’s not the case.
The second sign of Intel’s drastic shift in business model came a day earlier, when Chief Executive Pat Gelsinger showcased a number of the company’s new chip designs. Rather than being based on a single piece of silicon, these are part of the company’s move toward chips that combine multiple components, or “chiplets,” into a single semiconductor.
One of the advantages of so-called “disaggregated” chip designs like this is that Intel doesn’t have to produce all the parts itself. So if it can’t get back to the cutting edge of manufacturing technology, it could turn to other companies to buy individual components that it can’t manufacture itself. Production of the other parts would still provide a way to keep the buzz of its own new chip factories going.
This could hurt profit margins, as Intel would not produce the most advanced components in its own factories. On the other hand, the design and integration of these new processors could provide some margin protection and give a premium to the chip packaging technology it has developed.
Whatever the outcome, this week’s developments point to a complex and technologically challenging new business model that will likely take years to materialize as new factories come online and new generations of chips are developed. It will also require a cultural transformation, as a company known for its highly insular culture learns to open up to other companies’ technologies, while trying to develop the new service mentality needed to run a successful foundry business.
Worse still, Intel is trying to pull off this transformation in the face of eroding market share and falling demand for chips. Its shares halved after the brief honeymoon period following Gelisinger’s appointment and its stock market value was eclipsed by AMD last month.
A new Intel may be beginning to take shape, but there’s a long way to go.