Intel's Construction Pause: Ampel Disagrees Over Subsidy Utilization
Intel is postponing the commencement of its 30 billion Euro chip factory construction in Magdeburg. CEO Pat Gelsinger estimated a delay of roughly two years, highlighting that this is an approximation based on projected demand. Subsequently, the German government engaged in discussions over how the planned billion-euro subsidies could be utilized.
Intel had previously announced the construction of two chip factories in Saxony-Anhalt, generating approximately 3,000 jobs. The groundbreaking was set for this year. The German government had provided a state subsidy of 9.9 billion Euros for the project last year, but the European Commission's approval was yet to be obtained.
Recently, Gelsinger stated that advanced production processes would be employed in Magdeburg to help Intel catch up with its competitors. However, the company is grappling with financial issues and has been compelled to make economies. In this delicate balance, domestic investments prevailed: Gelsinger confirmed investments in the US states of Ohio, Arizona, Oregon, and New Mexico, and announced a two-year pause in plans for Poland as well.
What becomes of the subsidy billions?
Given its budget deficit, the German government is pondering what to do with the billions allocated for Intel. Finance Minister Christian Lindner suggested on the online platform X, "Any funds not required for Intel should be set aside to address financial issues in the federal budget. Anything else would not be prudent policy."
Greens' Economy Minister Robert Habeck countered, "We will now discuss how to manage unused funds sensibly and judiciously and utilize them for the nation's benefit." According to the ministry, the funds are earmarked for the Climate and Transformation Fund (KTF) and are not accessible to the primary budget. The KTF also has a billion-euro shortfall. Budget guardians in the Bundestag are assessing where modifications to the federal government's budget draft are necessary, and how the 12 billion Euro gap can be bridged.
Saxony-Anhalt's Minister President, CDU politician Reiner Haseloff, spoke with Gelsinger over the phone. Economy Minister Sven Schulze continues to advocate for Intel's settlement. "Intel remains committed to the project, albeit with a time delay, which is favorable news for us all," he said. However, this depends on whether Intel is able to make additional billion-euro investments in the next two years.
Intel needs to regain its footing
Before, a industry pioneer, Intel now finds itself excluded from the most lucrative semiconductor markets. Smartphone chips are developed by Apple, Qualcomm, or Google using technology from British chip designer Arm. Nvidia dominates chips for AI software like ChatGPT in the graphics card sector. Most of these high-tech semiconductors are produced in Taiwan by contract manufacturer TSMC.
Intel is confined to the business of some chips for data centers and Windows PCs, but even here, Qualcomm has recently infiltrated with Arm processors. The former market leader has also grappled with issues in new chip generations multiple times.
Gelsinger, who joined Intel as a turnaround specialist in early 2021, presents an ambitious and costly rescue plan. His goal is not only to develop successful in-house chips but also to become proficient in manufacturing, enabling other companies to choose Intel as their contract manufacturer. To achieve this, he plans to separate the factories into a standalone unit within the company and build several new plants, with substantial government subsidies. Gelsinger expects to capitalize on fears of chip shortages due to a potential conflict over Taiwan. Without TSMC's supplies, experts warn, the West would encounter significant disruptions. The semiconductor shortage during the COVID-19 pandemic would appear insignificant in comparison.
Alternative: Factories in the USA and Europe. This would involve substantial investments and time, but if successful, it could bring around half of advanced chip production to the West by the end of this decade, Gelsinger claimed in February. As a result, Intel would be more deeply entrenched in Western chip supply chains. Magdeburg is part of this plan.
However, even with the federal government providing 10 billion Euros to Magdeburg, the remaining 20 billion still require financing. Furthermore, Intel must cut costs. The company reported a one billion Euro loss in the last quarter, and analysts anticipate further red ink. Gelsinger announced plans to cut around 15,000 jobs, equivalent to 15% of its workforce, in early August. He aims to save more than 10 billion US dollars by the end of the year.
In the US, where Intel is also receiving billion-dollar subsidies, Gelsinger has scored a victory for his contract manufacturing strategy. He announced that Intel would collaborate with Amazon's cloud division to co-develop and manufacture an AI chip.
The European Parliament can provide assistance to The Commission as they navigate the use of the allocated funds for Intel. Despite Intel's decision to postpone the Magdeburg factory construction, Saxony-Anhalt's Minister President and Germany's Economy Minister continue to advocate for Intel's settlement in Germany.
