Can Intel Reignite the Fire: Will a Spending Spree Lead to Chip Dominance?

Can Intel Reignite the Fire: Will a Spending Spree Lead to Chip Dominance?Intel, once the semiconductor king, is now embroiled in a spending war. To catch up with TSMC in cutting-edge chip production technology, Intel has already invested tens of billions of dollars

Can Intel Reignite the Fire: Will a Spending Spree Lead to Chip Dominance?

Intel, once the semiconductor king, is now embroiled in a spending war. To catch up with TSMC in cutting-edge chip production technology, Intel has already invested tens of billions of dollars. However, with slowing business growth and tightening finances, whether Intel can catch up with its rivals remains a major question.

Intel has fallen behind TSMC in terms of chip density, cost, and energy efficiency. As competitors abandon the vertically integrated design and manufacturing model and benefit from TSMC's technological advancements, Intel's market share has been steadily eroded. Over the past five years, Intel's stock price has halved, a direct consequence of its ongoing spending spree.

To turn the tide, Pat Gelsinger, the former chief architect of Intel's landmark 80486 chip from 40 years ago, returned to the company as CEO in 2021. Gelsinger promised that Intel would launch chips next year that would rival TSMC's in performance, a mission that seems close to completion.

However, this is only part of the challenge. Intel also needs to prove it can produce cutting-edge chips at scale and efficiently, and attract external customers to use its manufacturing services. This requires massive capital investment, and a shortage of funds is one of Intel's biggest problems.

TSMC plans to invest $30 billion in 2024, with about 80% going towards the most advanced semiconductor manufacturing. According to Intel's estimates, this is equivalent to building a new $25 billion factory. While Intel doesn't need to invest that much, company executives say that public subsidies and co-investors like Brookfield could provide a quarter of the needed funds. But this still means Intel needs roughly $19 billion annually to maintain a pace of building one new factory per year.

Intel currently plans to spend roughly that amount next year. However, Gelsinger has also pledged that capital expenditures will make up a quarter of revenue in the long term. This means Intel's revenue needs to reach around $750 billion to support its investment plans, which is about a third higher than what analysts expect Intel's revenue to be next year.

Meanwhile, the cost of building new factories is only increasing. TSMC's operating profit margins are higher than Intel's, and its capital expenditures have averaged 40% of revenue over the past decade. This means the two companies are heading in opposite directions. TSMC can afford more investment with its higher profit margins, while Intel needs to seek external funding.

Intel's revival strategy relies on two pillars: innovation in chip design and regaining dominance in manufacturing. If its current plans come to fruition, Intel's prowess in chip design will be proven. However, the financial gap is widening, and unless Intel achieves a phenomenal turnaround, Gelsinger may have to rethink his strategy on manufacturing.

The final outcome of this spending war is still unknown. Can Intel, with its strong technical expertise and financial prowess, reignite the fire and reclaim its chip dominance? The answer will be revealed in the coming years.