Intel Plans Spin-off of Chip Manufacturing to Address Downturn

Highlights:

• Gelsinger stated that spinning off Intel Foundry as a fully independent subsidiary will allow it to explore separate funding options.
• AWS has provided its own AI chips, such as Trainium, for years as a cost-effective alternative to Nvidia’s GPUs. Similarly, Google LLC and Microsoft Corp. also manufacture their own AI chips.

Intel Corp. has planned a spin-off of the chip manufacturing business in an effort to reverse a yearslong downturn, reduce significant financial losses, and support its declining stock value.

In a recent announcement, Intel CEO Pat Gelsinger stated that the plan is for Intel Foundry to operate as a completely independent subsidiary, with full “independence” from the parent company.

The shift will allow Intel Foundry to establish its own board of directors and report financial results independently from Intel. Additionally, the company announced it will pause construction on two factories in Germany and Poland, with plans to resume once market demand increases. However, Intel will proceed with building new fabrication plants in Arizona, Ohio, Oregon, and New Mexico, bolstered by an additional USD 3 billion in funding from the U.S. government.

Intel is also reportedly considering selling part of its stake in Altera, the programmable chip division it acquired in 2015. Additionally, the company intends to reduce its global real estate footprint by approximately two-thirds as part of the broader strategy.

Gelsinger explained that establishing Intel Foundry as a fully independent subsidiary will enable it to seek out independent funding opportunities. The decision followed a meeting between Gelsinger, other executives, and Intel’s board of directors to review the company’s future direction.

Intel initially positioned the foundry business as a central part of its turnaround strategy, announcing a few years ago that it would manufacture semiconductors for other chipmakers, aiming to compete with Taiwan Semiconductor Manufacturing Co., which produces but does not design its own chips. However, Intel Foundry has reportedly placed a significant financial burden on the company, depleting around USD 50 billion over the past two years.

By spinning off Intel Foundry, the company aims to strengthen the performance of its core chip design business. According to a source familiar with Intel’s internal plans, there is also the possibility that Intel could eventually spin off Intel Foundry as a completely independent, publicly traded company. With its own operating board and corporate structure already established, this move would be more feasible if Intel chooses to go down that path in the future.

European Chip Factories Postponed

In a related decision, Intel will put its chip fabrication projects in Germany and Poland on hold for “around two years, depending on expected market demand,” according to Gelsinger. The company will also cancel plans to construct a new chip facility in Malaysia while continuing to move forward with its U.S. projects.

The decision to continue building its U.S. chip facilities was likely influenced by the additional USD 3 billion grant from President Joe Biden’s administration under the CHIPS and Science Act, which seeks to strengthen the domestic chipmaking industry. Intel stated that the funding is allocated for the “Secure Enclave” program, a joint initiative with the U.S. Department of Defense to develop more secure chips for military use.

The Biden administration has poured billions into expanding U.S. semiconductor manufacturing to lessen the country’s dependence on Taiwan, which produces the majority of the world’s chips. The U.S. views this dependence as a geopolitical risk, especially considering China’s intentions to reunite Taiwan with the mainland.

This is why Intel is currently constructing four chip fabrication plants across four U.S. states. In March, the company secured USD 8.5 billion in government funding to expedite these projects.

Tailored AI Chips for AWS

Intel received positive news as it announced a multiyear agreement with Amazon Web Services Inc. to manufacture custom AI chips. This deal builds on their longstanding partnership, with AWS being one of Intel’s largest customers, purchasing millions of its CPUs annually to power its cloud servers.

The agreement could provide Intel with a foothold in the highly profitable AI chip market, which is currently dominated by competitor Nvidia Corp.’s graphics processing units (GPUs). While Intel does produce its own AI chips, like the Gaudi 3 accelerators, Nvidia’s GPUs remain the industry favorite, effectively closing the AI chip market to Intel until now.

For years, AWS has provided its own AI chips, including one named Trainium, as a cost-effective alternative to Nvidia’s GPUs. Google LLC and Microsoft Corp. also develop their own AI chips.

Intel shared limited details about the new Amazon AI chips but noted that they will be manufactured using its advanced 18A chipmaking process, which is currently being fine-tuned at a facility still under construction in Ohio.

The deal is expected to boost confidence in Intel’s 18A process, which faced challenges earlier this month when Reuters reported that another partner, Broadcom Inc., was dissatisfied with its performance in a recent evaluation. The report indicated that Broadcom is still assessing whether the 18A process will be reliable enough for its own chip production, scheduled to begin next year.

Intel has ambitious plans for the 18A process, with Microsoft expressing interest in utilizing it for its upcoming generation of chips.

Given the recent developments, Intel will be hopeful that it can regain its position as a leading global chipmaker. The company’s fortunes have declined over the past five years, partly due to its inability to anticipate the AI boom and the rise of Advanced Micro Devices Inc. as a major competitor in its primary server and personal computer chip markets.

In fiscal 2023, Intel’s chipmaking division incurred operating losses exceeding USD 7 billion. In its most recent earnings call, the company disappointed investors by falling short of expectations. Additionally, last month, Intel announced its largest-ever job cuts, with plans to lay off 15,000 employees.

It remains uncertain whether Intel will be able to reclaim its status as the leading chipmaker, but Gelsinger has expressed optimism about his prospects for achieving this goal.

“This is the most significant transformation of Intel in over four decades. Not since the memory to microprocessor transition have we attempted something so essential. We succeeded then – and we will meet this moment and build a stronger Intel for decades to come,” he said in a statement.