The government's 10% stake in Intel Corp. (INTC) has raised fundamental and philosophical questions about the state of capitalism and the free markets in the U.S. under the Trump administration, but there’s another question that’s just important.
What if Intel’s manufacturing has fallen so far behind its rivals that it can’t be turned around even with $8.9 billion of Uncle Sam’s money?
In a recent note, Frank Downing, director of research for AI & Cloud at Ark Invest, cast doubt on whether the government’s involvement will be enough to revive the struggling chipmaker.
“The government seems to be taking an ownership interest because Intel has fallen well behind Taiwan Semiconductor Manufacturing Company (TSMC), the leading global semiconductor manufacturer,” Downing wrote.
Although he notes that “Intel designs and manufactures its own high-end chips,” it was TSMC who invented the modern foundry model for tech giants like Apple (AAPL), Nvidia (NVDA) and AMD (AMD), who design their own chips but outsource their manufacturing.
Through their partnership with TSMC – and with the aid of TSMC’s expertise – these companies have increased their volume and productivity by building on its foundry model.
At the same time, TSMC “amortizes the growing research and development (R&D) and capital expenditure (CAPEX) investments required to build next-gen semiconductor capacity.”
One of the biggest reasons for TSMC pulling so far ahead of Intel has been massive orders from Apple for its iPhones.
Missing out on the mobile boom could cause Intel to lose the AI boom
Intel’s failure in mobile is substantial, as the company missed out on “a massive market for nearly two decades,” as Ben Thompson noted in a post for his Stratechery blog.
This has left Intel lacking the economies of scale of the TSMC foundry model, according to Thompson.
In fact, Thompson first called on Intel to become a foundry 12 years ago, shortly after launching his blog.
The “real payoff from Intel building a foundry business in 2010, or 2013 as I recommended, is that they would have been ready for the AI boom,” Thompson recently wrote.
“Every hyperscaler is still complaining that demand exceeds supply for AI chips, even as Intel can’t win customers for its newest process that is actually best-suited for AI chips.”
And it’s not just TSMC that Intel has fallen behind: The company also trails AMD by a significant margin in the CPU processor market as well.
But the substantial challenges that Intel is facing in trying to grab market share away from TSMC came to the forefront again last week when Qualcomm Inc. (QCOM) CEO Cristiano Amon told Bloomberg Tech that Intel’s production technology is simply not good enough for Qualcomm to use it as a supplier.
“Intel is not an option today,” he said. “We would like Intel to be an option.”
While Downing seems to understand why the Trump administration is taking a stake in Intel, he doubts whether it will be a successful deal.
“Government backing could turn out to be a Hail Mary pass with low odds of success but might be the only chance for the US to secure domestic manufacturing capability for high-end semiconductors—beyond, of course, TSMC and Samsung facilities in the US,” he wrote.
The government’s backing has at least turned around Intel's share price, which is now up 22.1% for the year.
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