Chapter 1: Overview of Intel's Current Challenges

The U.S. administration had high expectations for Intel, envisioning the company as a key player in revitalizing the nation's semiconductor manufacturing sector. However, as Intel's financial health declines, this ambitious initiative faces serious hurdles, potentially signaling a significant setback for one of the most far-reaching industrial strategies in the United States in many years.

Just five months prior, President Biden and Intel CEO Pat Gelsinger announced a $20 billion subsidy program centered in Arizona. Yet, growing doubts about Intel's ability to access this funding have introduced uncertainty surrounding the future of this initiative.

More critically, Intel's ongoing struggles could undermine a vital objective for the U.S. government: to establish a dependable supply chain for advanced chips intended for the Department of Defense and to ensure that by 2030, the U.S. represents 20% of global advanced processor output.

As sales plummet and cash flow issues worsen, Intel's leadership is contemplating drastic actions, including the possibility of spinning off its manufacturing arm or scaling back construction projects worldwide. Such decisions could complicate Intel's efforts to obtain the governmental support it desperately needs.

Under the Chips and Science Act, enacted in 2022, Intel stands to receive $8.5 billion in grants and $11 billion in loans, contingent upon achieving specific key milestones and passing stringent due diligence checks. This scrutiny is applied uniformly to all applicants to ensure taxpayer funds are allocated only to companies that fulfill their commitments. However, to date, no financial support has been granted to any potential beneficiaries, including Intel.

Intel has expressed frustration over delays in fund disbursement and has urged a quicker process. Nevertheless, sources indicate that Intel has not provided all requested information to government officials assessing the viability of its manufacturing plans. The U.S. Department of Commerce, responsible for managing the distribution of funds under the Chips Act, has not disclosed details about the ongoing negotiations.

In a public statement, Intel emphasized its progress on projects in Arizona, New Mexico, Ohio, and Oregon, expressing eagerness to finalize the funding agreements promptly.

Intel's financial report, released on August 1, revealed unexpected losses and a grim outlook, adding pressure on the company. Following this report, Intel's stock plummeted significantly, and two major credit rating agencies downgraded its debt to near "junk" status. Additionally, the company announced layoffs of around 15,000 employees, raising concerns about its commitment to bolstering the U.S. semiconductor workforce and drawing criticism from lawmakers.

"We are diligently working to resolve these issues," Gelsinger stated at a recent investor conference. "Like all industry players, we recognize the need for flexibility and efficiency in our operations."

According to insiders, a review of the company's next steps is scheduled for a mid-September board meeting. Should Intel decide to reduce its U.S. projects, it is highly likely that the subsidies it receives will be adversely affected.

The internal turmoil facing Intel could transform this landmark public-private partnership into a political liability. In March, during a visit to Chandler, Arizona, President Biden announced that Intel would be the largest beneficiary of funds from the Chips Act, which allocates $39 billion in subsidies for domestic production of essential electronic components, along with additional loans and tax incentives.

Intel is positioned to receive a quarter of the promised funding to the private sector and is the sole recipient of $3.5 billion designated for the production of defense and intelligence chips. The success of Intel's manufacturing plans is critical for the effective implementation of the Chips Act.

Nevertheless, Intel's expansion will be dictated by market demand rather than mere political promises. Gelsinger has indicated that the company's current strategy involves first expanding factory infrastructure, followed by the gradual installation of more sophisticated equipment based on "clear market demand."

For example, in 2012, then-President Barack Obama announced at Intel's Arizona facility that it would begin operations the following year. However, the project faced delays and did not become fully operational until 2020. Further expansion plans for the Arizona site were revealed in 2021.

Mike Schmidt, Director of the Chips Office at the Department of Commerce, acknowledged in an early August interview, "We are acutely aware of the semiconductor industry's cyclicality and fierce competition, and we must remain adaptable to changes."

Regarding Intel, Schmidt noted, "We are satisfied with Intel's expansion plans and the milestones both parties have agreed upon," as outlined in a preliminary agreement that President Biden announced in March.

Insiders have indicated that Intel is eager to finalize the deal soon and secure the first tranche of funding. The company highlighted during initial negotiations that it had already made substantial investments and provided adequate assurances regarding its overall strategy.

However, Intel continues to face challenges in demonstrating the robustness of its products, especially with competitors like TSMC gaining considerable recognition for their technology. Intel has claimed that companies such as Broadcom, MediaTek, and Microsoft are contemplating utilizing its foundry services, but full-scale production has yet to commence.

Furthermore, U.S. Commerce Secretary Gina Raimondo has encouraged executives from Nvidia and AMD to consider manufacturing chips at Intel's expansive facility in Ohio, expected to become one of the largest semiconductor manufacturing sites globally. Yet, insiders reveal that neither company currently has plans to do so. Nvidia depends on TSMC and Samsung to fulfill its production requirements, indicating that it is still in the early stages of evaluating Intel as a potential supplier. AMD CEO Lisa Su has refrained from commenting directly on whether the company is considering Intel's foundry services, expressing satisfaction with TSMC, its current primary supplier.

In addition to the Ohio facility, the funds Intel anticipates receiving from the Chips Act will also support initiatives in Oregon, New Mexico, and Arizona. Insiders report that the Arizona plant is not only Intel's manufacturing hub in the U.S. but will also aid the Department of Defense's "Secure Enclave" chip initiative. This program aims to create a trusted network of foundries to produce essential non-cutting-edge chips crucial for national security.

This initiative presents substantial economic challenges. A recent report from the National Academies of Sciences noted that current trusted foundries meeting DoD standards face high operational costs. However, the DoD's procurement process often fails to provide a sufficient return on investment for these suppliers. Researchers recommend that the DoD should relax its procurement criteria to better align with the supply chain established by the Chips Act.

In other words, the military could explore purchasing advanced chips from U.S.-based factories owned by foreign companies like TSMC and Samsung. Despite this, insiders indicate that the DoD remains firm in its position that the "Secure Enclave" project should rely on domestic suppliers, although some officials have begun to consider alternative options.

This situation is complicated for all stakeholders, particularly after the DoD canceled its original plan in February, which had outlined a $2.5 billion contribution from the department to the "Secure Enclave" project, with the remaining funding to be provided by the Department of Commerce. Following the cancellation, Congress directed the Department of Commerce to cover the project's total costs, incorporating some of these new responsibilities into Intel's $8.5 billion subsidy package.

As per sources, this implies that part of Intel's funding will come with stringent conditions linked to the defense initiative, though the situation remains fluid. Neither Intel, the Department of Commerce, nor the DoD has publicly commented on these developments. Moreover, the Department of Commerce was compelled to scrap a project aimed at supporting commercial research and development, resulting in the rejection of an application from Applied Materials for funding a crucial Silicon Valley initiative. To revive this program, the Department of Commerce is seeking an additional $3 billion in funding under the Chips Act, but this proposal has faced opposition in Congress.

Chapter 2: Implications of Intel's Financial Crisis

This video discusses the implications of Intel's $8.5 billion federal subsidy and its significance for Oregon's economy.

This video examines Intel's ongoing struggles and critiques the government's subsidies for large corporations.