Intel: Chips Act subsidies may impede a return to former glory

The US has embarked on an ambitious and expensive project: rebooting a domestic manufacturing industry for leading-edge chips. A downturn in demand ratchets up the pressure.

Intel imagines the push will help it regain global dominance. It would not be the first time the hopes of the US chip giant have exceeded its prospects.

The US Chips Act puts more than $52bn up for grabs via a mishmash of loans, guarantees for third parties and direct funding. Money will arrive in the coming months.

Intel is expected to be one of the biggest beneficiaries. But semiconductor companies jostling for funds are aiming at a moving target. The US government has introduced extra conditions, including childcare provision and limiting investment in Chinese entities. Funds cannot be spent on buybacks and dividends. Some projects will need to share profits. 

Intel can find ways to tick those boxes. It helps that the US wants projects that contribute to America’s national security and reduce dependence on chips made in Taiwan. Unlike rival AMD, Intel designs and makes chips. 

Yet Intel’s stock is down 24 per cent since the Chips Act was signed into law last August. Falling demand for semiconductors is only one reason for this. The share price of rival AMD is down 15 per cent over the same period. 

Intel has a large, cumbersome corporate structure, reflecting its range of legacy businesses. It does not produce leading-edge chips. Last year, revenue fell by a fifth. It is expected to drop by the same amount this year. Net income margin has halved.

The company is, meanwhile, increasing capital spending to pay for new factories and designs. The figure is expected to climb from about 20 per cent of sales five years ago to the “low 30s” this year. Last month, Intel cut its dividend by two-thirds.

AMD’s net income margin has also fallen. Semiconductor demand is readjusting following high spending during the pandemic. But AMD has less onerous capex obligations. Its new Ryzen chips boast artificial intelligence capabilities. Margins are forecast to return to 21 per cent this year.

Subsidies have a tendency to reduce competitiveness rather than increase it. They could simply reduce pressure on Intel to improve its performance. If money was essential for a turnround, it should have started 10 years ago, when Intel was sitting on more cash than its rivals.