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Is Intel in the middle of one of the greatest transformations in business history? Or has Washington just committed to pumping tens of billions of dollars in a desperate attempt to regain leadership in global chip manufacturing?
The size of the US bet was revealed this week, as Intel revealed the extent of the gap in the manufacturing side of its business. Had it not been for the change in currency devaluation policies, the company would have reported a staggering $11.2 billion loss from manufacturing last year on sales of $18.9 billion. Even after extending the life of some of its manufacturing equipment by five to eight years, it was left with nearly $7 billion worth of red ink.
And that's not even the worst of it. The company expects manufacturing losses to reach their lowest levels this year, before slowly recovering. Its already struggling shares fell another 8 percent.
This will never be a quick or easy transition. As Intel makes up ground and tries to return to leadership in the global chip industry, it is racing through five manufacturing “nodes,” or new processing technologies, in just four years — roughly half the time it normally takes. This has resulted in its manufacturing arm being charged enormous start-up costs for each generation of technology without allowing time to reach volume production, when healthy profit margins typically emerge.
The good news is that, nearly three years later, things are on the right track. This is no small matter: after a lost decade in which it squandered its leadership in the chip industry, Intel has a real chance to return to parity with its competitors TSMC and Samsung.
Politicians may derive some comfort from the decline in Intel's stock prices. The last thing the White House needs is any perception that taxpayer money has brought a windfall to Intel shareholders, after the company spent years disinvesting in its business until it could buy back stock.
However, the message from Intel this week was that things will take longer than many had hoped, and that rejection from the stock market is an ominous sign.
Breaking down the financial performance of its manufacturing arm, as Intel did, should have been an important milestone. This was supposed to give Wall Street confidence that its chip design and manufacturing businesses were now run independently, increasing pressure on each to perform.
It was also supposed to act as a catalyst for a rebound in stock prices. CFO David Zinsner has suggested that within two years, the manufacturing business alone should be worth at least $200 billion — more than the entirety of Intel is worth today. The trick's failure is due to one simple fact. As far as most investors are concerned, the two sides of Intel's business remain interconnected at the highest level, and their interdependence will continue to determine the company's fortunes.
Newer processing nodes require larger investments than ever before, which means larger production volumes than ever before to make them economically viable. The United States supports Intel because it sees the company's new foundry business — manufacturing chips on behalf of other companies, not just Intel's own designs — as an important national asset. But the chip industry's long product cycles mean it will take years to bring on new customers, leaving Intel's manufacturing business dependent on its chip design arm as a major customer.
In this regard, things are not going well. Having completely missed the mobile revolution, Intel is now struggling to come up with the right products for the booming AI market. It said this week that failure to hit targets in the sale of AI accelerators — chips that speed up the training of large AI models — was a big reason it missed its 2026 profitability targets until the end of the decade.
This is ominous. For investors, the shift continues to expand going forward, with little likelihood of anything on the horizon to help the stock. Meanwhile, for politicians in Washington, the costs of industry policy in the semiconductor industry are beginning to become clear. They were already facing the need to provide more financial support to Intel, just to keep up with the subsidies enjoyed by the company's competitors. If a company faces chronically low profitability and struggles to reach full capacity in its new factories, this will only add to the pressure.
Supporting Intel to become the US chip manufacturing champion may have been the right move from a national security and economic perspective, but future administrations in Washington will learn the full costs of that decision.
richard.waters@ft.com
