Intel Steps Up Capital Spending to Regain Chip-Making Crown

Intel has been racing to catch up to rivals in the most advanced process technologies and open a contract chip-making business. But CEO Pat Gelsinger warned that it would take an unprecedented level of capital spending to turn the troubled chip giant around.

Gelsinger said on a conference call for investors last month that it plans to invest $25 to $28 billion in 2022 to ramp up its production capacity, upgrade equipment, and erect more advanced chip fabs. This is a huge step up from its projected budget of $18 to $19 billion in capital spending in 2021 and $14.5 billion in 2020. Executives said that they are leaving open the door for even more investment to aid in the recovery plan.

“It is abundantly clear to us that we must invest in our future right now to accelerate past the rest of the industry and regain unquestioned leadership in what we do,” Gelsinger said during the conference call.

Earlier this year, Intel hired Gelsinger to reinvigorate its chip manufacturing prowess, which had been at the heart of its dominance of the chip business for decades. Prolonged delays in developing its most advanced chips resulted in it ceding the chip-making crown to TSMC. That is opening the door for AMD to challenge it for the first time in years while pushing Apple, AWS, and other customers to invest in in-house processors.

Intel has been investing aggressively to expand its production capacity as part of its new “IDM 2.0” strategy, including a $20 billion bet on new factories in Arizona to house its most advanced chip-making technology. But Intel is not trying to close the gap with rivals only for the sake of companies that buy its processors. It also has ambitions to take on TSMC in the business of making chips designed by outsiders, even its rivals.

But it will take roughly four years before Intel will see a significant boost to sales and profit from its costly move into contract chip manufacturing. "It takes a couple of years for a customer to pick a foundry, move a design, start to ramp in the industry,” Gelsinger said. “It will have minimal impact in the next couple of years, and then it will really deliver in years four and five, and in the second half of the decade more significantly."

He said its new foundry business will allow it to grow faster and wring more money out of its investments in its process and packaging technology and chip designs, which it is opened up to other companies for the first time

Intel said that net profit in its latest quarter soared 60% to $6.8 billion, while it reported sales of $18.1 billion, up 5% from the same quarter last year.

The chip-making giant said the recovery plan will pressure its profits in the short term. It anticipates annual gross margins to fall into the 50% to 55% range for three years or so as it invests in its production capacity and other efforts to revive its process technology. That's a significant step down from the 60%-plus range it has enjoyed for years.

“These investments that we are currently making on our roadmap will pay off as those products return to leadership,” Gelsinger noted. “Leadership products beget leadership pricing that begets leadership margin.”

The chip-making giant is in the early stages of one of its most ambitious roadmaps in years, one that Intel has said puts it on the path to match TSMC and other rivals in performance by 2024 and regain the lead in process technology by 2025. Intel said it plans to upgrade its central processing chips with smaller, faster transistors once a year for the foreseeable future.

Intel has said that it would be able to race ahead of Moore’s Law within the next decade as it brings process technologies, such as RibbonFET and PowerVia, and 2.5D and 3D advanced packaging tools into the fold.

Intel is also expanding the use of EUV lithography at every new process node to scorch smaller and smaller transistors on chips using ultra-short wavelengths of light. Such tools can cost more than $100 million each. Intel is also partnering with ASML to develop next-generation “high-NA” EUV tools, which it plans to deploy in fabs by 2024.

It is working to build out other parts of the EUV ecosystem, including metrology gear and other chip-making tools used to support the EUV lithography process. It is also investing in materials such as EUV photoresists.

To regain its chip-making throne, Intel not only has to become better at bringing all these technologies into mass production, but it also needs to expand and upgrade its fabs to cater to potential new foundry clients.

Intel has lured other players in the semiconductor industry to use its foundry services. Qualcomm said it has agreed to collaborate with Intel to develop chips based on the 20A process node due in 2024. Amazon Web Services (AWS) plans to adopt the advanced packaging tools Intel is offering customers through its foundry division. Intel has previously said it has had discussions with more than 100 potential customers.

Intel has also agreed to build chips for the US Defense Department based on its 18A node due in 2025. It also said that it has several customers planning test runs of chips based on its legacy 16-nm technology.

But the cost for companies to stay competitive keeps rising. The global chip shortage is pushing foundries to invest hundreds of billions of dollars in spending to boost capacity and combat the supply woes wreaking havoc since last year. TSMC, the world's largest made-to-order chip maker with customers including Apple, AMD, and even Intel, said it plans to invest $100 billion by 2023 to keep up with a deluge of chip demand.

“We are one of the few companies with both the technical and financial resources to win in a market that is increasingly leading edge and challenged by the extreme physics of rejuvenating and continuing Moore's Law,” Gelsinger said.

Intel and other U.S. chip firms are urging the government to pass funding to aid in their factory expansions.

The global chip crunch has underscored the indispensable role these components play in the automotive sector and other industries. As chips have soared to the top of national agendas, Intel and other firms are trying to cash in, urging governments to roll out subsidies to assure supply and lure investments. Intel has reportedly been knocking on the doors of governments around the world, including in the U.S. and Europe.

In the US, political leaders have heard the industry's pleas. In June, the Senate passed the U.S. Innovation and Competition Act (USICA) that includes $52 billion to fund the CHIPS for America Act approved last year, which will promote more made-in-the-U.S.A. chips.

But the proposed funding has been stalled in the U.S. House of Representatives for months.

The U.S. semiconductor industry is also lobbying for the Facilitating American Built Semiconductors (FABS) Act, which was introduced in the Senate in June and would put in place a 25% investment tax credit for U.S. fabs and chip-making tools that go inside them. The industry is in favor of the bill because it promises to create long-term resources for chip firms to retool, expand, and upgrade equipment in semiconductor fabs.

“With bipartisan support in both houses, we’re hopeful the CHIPS act will be passed by the end of this year, allowing us to accelerate decisions for our next U.S. site,” Gelsinger said. “This will also enable a more level playing field with our competitors who enjoy significant support from their governments.”