Intel's Struggle Could Be a Major Setback for the US CHIPS Act: Complex Interests Behind Funding Dispute

Intel's Struggle Could Be a Major Setback for the US CHIPS Act: Complex Interests Behind Funding DisputeOn September 5th, news broke that Intels financial woes are posing a serious challenge to the US governments ambitious plan to revitalize domestic chip manufacturing, potentially setting the stage for a major setback to one of the most significant industrial policies in decades.Five months ago, President Joe Biden and Intel CEO Pat Gelsinger made a joint announcement in Arizona about a $20 billion subsidy package

Intel's Struggle Could Be a Major Setback for the US CHIPS Act: Complex Interests Behind Funding Dispute

On September 5th, news broke that Intels financial woes are posing a serious challenge to the US governments ambitious plan to revitalize domestic chip manufacturing, potentially setting the stage for a major setback to one of the most significant industrial policies in decades.

Five months ago, President Joe Biden and Intel CEO Pat Gelsinger made a joint announcement in Arizona about a $20 billion subsidy package. However, the plans future is now uncertain as questions arise about Intels ability to secure the funding. More importantly, Intels predicament could threaten crucial policy goals, including building a secure supply chain of cutting-edge chips for the Department of Defense and achieving a 20% global share of advanced processor production by 2030.

Intel is facing a deeper-than-expected sales slump and cash flow crisis, forcing executives to consider drastic measures, such as potentially spinning off its manufacturing operations or scaling back global factory construction. These changes could complicate the companys access to funding amidst its urgent need for government support.

Under the CHIPS and Science Act passed in 2022, Intel was initially expected to receive $85 billion in grants and $110 billion in loans, contingent upon achieving certain milestones and passing rigorous due diligence. This process was designed to be transparent and consistent for all applicants, ensuring taxpayer funds went only to those delivering on their promises. However, no applicant, including Intel, has received any funds yet.

Amid ongoing negotiations, Intel has expressed dissatisfaction with the government's delay in releasing funds, urging them to expedite the process. But, according to informed sources, Intel has refused to provide certain information requested by government officials for assessing the viability of its manufacturing plan. The US Department of Commerce, responsible for administering the CHIPS Act funds, has remained silent on the negotiation details. In a statement, Intel said, "We have made significant progress on our projects in Arizona, New Mexico, Ohio, and Oregon, and we look forward to finalizing financing agreements soon."

Intels August 1st earnings report, revealing an unexpected loss and bleak outlook, added tremendous pressure. Following the report, Intel's stock experienced its worst decline in decades, and two major credit rating agencies downgraded its debt rating to near "junk" status. Furthermore, Intel announced layoffs of approximately 15,000 employees, raising concerns about its ability to bolster the US semiconductor workforce and drawing criticism from lawmakers.

"We've been working to address these issues," Gelsinger said at an investor meeting last week. "Like all companies in the industry, we recognize the need to operate with flexibility and efficiency." According to informed sources, Intel is set to discuss its next steps at a board meeting in mid-September. Should the company decide to scale down its US projects, its subsidy allocation would likely be revised accordingly. Internal turmoil could transform this landmark public-private partnership into a political burden.

In March, during a visit to Chandler, Arizona, President Biden declared Intel the largest beneficiary of the CHIPS Act funding. The Act allocates $39 billion for domestic subsidies for critical electronic component manufacturing, along with hundreds of billions in loans and tax breaks. Intel not only secured a quarter of the private sector funding commitments but also served as the exclusive recipient of $3.5 billion for the Department of Defense and intelligence chip manufacturing program. Intels factory plans are crucial to the successful execution of the entire CHIPS Act.

However, Intel's expansion pace will be driven by market demand, not solely by political promises. Gelsinger stated that the companys strategy is to expand its factory infrastructure first, then gradually outfit it with more expensive equipment based on "clear market demand." For instance, in 2012, then-President Barack Obama gave a speech at Intels Arizona plant announcing its launch the following year. However, Intel delayed the project, only fully operational in 2020. Subsequently, the company announced further expansion plans for its Arizona plant in 2021.

Mike Schmidt, director of the Commerce Department's CHIPS Office, said in early August, "We know the cyclical nature and intense competition in the semiconductor industry, and we must be flexible in adapting to changes. Regarding Intel, Schmidt added, "We are satisfied with Intel's expansion plans and the milestones we've jointly set." These milestones have been clearly defined in a preliminary agreement, announced personally by President Biden in March.

Informed sources reveal that Intel hopes to finalize the deal and secure its initial funding as soon as possible. In early negotiations, the company emphasized its significant investments and provided sufficient guarantees for its overall roadmap. However, Intel faces challenges in proving its product strength, given the widespread recognition of technologies from companies like TSMC. Intel claims that some companies, including Broadcom, MediaTek, and Microsoft, are considering its foundry services, but no company has commenced full-scale production yet.

According to informed sources, US Commerce Secretary Gina Raimondo has encouraged executives from Nvidia and AMD to consider producing chips at Intels massive Ohio plant, poised to become one of the worlds largest chip manufacturing facilities. However, these sources indicate that neither company currently has plans to do so. Nvidia relies on TSMC and Samsung to meet its production needs, but the company states it is currently only in the initial stages of evaluating Intel as a potential supplier. AMD CEO Lisa Su avoided questions about whether the company is considering using Intels foundry services, stating AMD is satisfied with its current primary supplier, TSMC.

Beyond Ohio, Intels CHIPS Act funds will also support projects in Oregon, New Mexico, and Arizona. Sources reveal that the Arizona plant is not only Intels manufacturing hub in the US but will also support the Department of Defense's "secure enclave" chip program. This program aims to establish a network of trusted foundries for producing non-cutting-edge chips crucial for national security.

This poses a significant economic challenge. According to a recent report by the National Academies of Sciences, Engineering, and Medicine, existing trusted foundries must shoulder high operating costs to comply with DoD requirements. However, DoD purchases often fail to provide sufficient returns on investment for these suppliers. Researchers recommend that the DoD relax its procurement standards to better integrate with the supply chain system established through the CHIPS Act. In other words, the military could consider procuring advanced chips from foreign companies like TSMC and Samsung operating factories in the US.

Despite this, sources reveal that the DoD remains committed to relying on domestic suppliers for the "secure enclave" project, but some officials have begun preliminary discussions about alternative solutions. This presents a thorny issue for all stakeholders, particularly since the DoD scrapped its original plan in February, which entailed the DoD funding 25% of the "secure enclave" project with the remaining portion covered by the Commerce Department. After the cancellation, lawmakers instructed the Commerce Department to absorb the entire project cost, incorporating part of the newly added responsibility into Intels $85 billion subsidy package.

Sources indicate that this means a portion of Intels funding will come with stringent conditions tied to the defense project, although the situation is still evolving. Intel, the Commerce Department, and the DoD have not publicly commented on the matter.

Furthermore, the US Department of Commerce has been forced to cancel a program intended to support commercial research, leading to the department rejecting Applied Materials' bid for research funding for a crucial project in Silicon Valley. To revive this program, the Commerce Department is seeking an additional $3 billion in funding from the CHIPS Act, but the proposal has faced obstacles in Congress.

Intels predicament underscores the complex challenges faced by the US government in implementing the CHIPS Act. On one hand, the government needs to ensure that funds are effectively used to support the growth of the US chip manufacturing industry. On the other hand, the government must balance the needs of different stakeholders, including the Department of Defense's urgent requirement for secure chips and the influence of market demand on industrial development. Whether Intel can overcome its difficulties and ultimately secure government funding will have profound implications for the future of the US chip industry.