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The Russian invasion of Ukraine in February 2022 essentially marked the end of a thirty-year peace dividend.  During this relatively stable geopolitical period, major conflicts were regional (Afghanistan, Iraq, Libya, Syria) and “contained”, trade friction was subdued and supply chains were well established (other than during COVID).  The world experienced above average economic growth driven by a combination of low trade barriers, globalization and “off-shoring”.

For North American and European companies, off-shoring involved the relocation of manufacturing facilities to lower cost countries in Southeast Asia.  The semiconductor industry exemplified this trend. For decades Intel Corporation primarily manufactured its semiconductor chips in US-based fabrication plants (often referred to as foundries or “fabs”).  This changed in the late 2010s when Intel decided to follow its chip design competitors (AMD, Nvidia, Qualcomm, Micron, etc.) moving to a “fabless” business strategy by shifting much of its chip manufacturing off-shore. 

Currently, upwards of 90% of the world’s most advanced semiconductor chips are manufactured in Taiwan by one company, Taiwan Semiconductor Manufacturing (TSM).  Technology investors appear to be very complacent of this overwhelming reliance on Taiwan.  US politicians, however, seem to better understand the precarious situation of the US chip industry and view this as a major national security issue.  The moment there is any conflict between China and Taiwan, it is possible that chip production at TSM is curtailed or disrupted.  Any stoppage of Taiwanese chip exports would have a massive impact on the US economy.  

In August 2022, President Biden signed into law the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act which includes $52 billion in subsidies for chip manufacturing, semiconductor research and workforce training on US soil as well as generous tax subsidies. The CHIPS Act was a catalyst for the Intel strategy to re-shore chip manufacturing to the US.  During the past four years, Intel has invested over $80 billion in semiconductor manufacturing and research highlighting how costly and challenging it will be to again become a major US chip manufacturer.

To date, Intel has also received the largest direct investment through the CHIPS Act with $8.5 billion for semiconductor projects.  Intel is likely to receive an additional $11 billion in loans in the foreseeable future.  These funds will be used for fabs and research centers in Arizona, Ohio, New Mexico and Oregon.  By 2030, the US will not be completely self-sufficient in chips, however, production should roughly equal the needs for defense and critical infrastructure (data centers and telecom). Providing some confirmation of Intel’s re-shoring strategy, Intel has sold 49% ownership in two of its new fabrication locations.  In 2022, Intel sold 49% to jointly fund a semiconductor fabrication facility under construction in Arizona to Brookfield Infrastructure Partners for $15 billion.  In 2024, Intel sold 49% in a smaller fabrication facility in Ireland to Apollo Global Management for $11 billion.

Intel’s massive investment in chip fabrication is remarkable given the valuation that investors currently assign to the company.  At present, Intel has sales of $55 billion and a market capitalization of $140 billion (2.5 times).  In contrast, Advanced Micro Devices (AMD), a close competitor, has sales of $23 billion and a market capitalization of $290 billion (12.5 times).  As a “fabless” semiconductor company, AMD has less than $2B in capital investment over the past 4 years.  Taiwan Semiconductor Manufacturing has sales of $70 billion and a market capitalization of $980 billion (13.5 times). 

Undoubtedly, the Intel re-shoring transition will be extremely challenging.  Over the past year, Intel’s foundry business has experienced operating losses of $7 billion as it constructs its new US based manufacturing facilities.  Given that new foundries take at least four years to finalize, Intel will not generate a return on investment until after 2025.  Despite all of this, the massive valuation difference between Intel and AMD or TSM is difficult to justify.  Intel appears so “cheap”, that the company may be a takeover candidate.

Intel is the only firm positioned to revitalize US semiconductor manufacturing. Ultimately, if the US desires to protect its lead in both computational (CPU) and AI (GPU) chips, domestic production is essential.