Biden-Harris' Dream of US Chip Renaissance in Doubt as Intel Struggles

The Biden-Harris administration’s big bet on Intel Corp. to lead a US chipmaking renaissance is in grave trouble as a result of the company’s mounting financial struggles, creating a potentially damaging setback for the country’s most ambitious industrial policy in decades.

Five months after the president traveled to Arizona to unveil a potential $20 billion package of incentives alongside Chief Executive Officer Pat Gelsinger, there are growing questions around when — or if — Intel will get its hands on that money. Intel’s woes also may jeopardize the government’s ability to reach its policy goals, which include establishing a secure supply of cutting-edge chips for the Pentagon and making a fifth of the world’s advanced processors by 2030.

Intel is mired in a sales slump worse than anticipated and hemorrhaging cash, forcing its board to consider increasingly drastic actions — including possibly splitting off its manufacturing division or paring back global factory plans, Bloomberg reported last week. That threatens to further complicate its quest for government funding, at a time when Intel desperately needs the help.

The Silicon Valley company is supposed to receive $8.5 billion in grants and $11 billion in loans from the 2022 Chips and Science Act, but only if the chipmaker meets key milestones — and after significant due diligence. That process, which applies to all Chips Act winners, has been clear from the outset, and aims to ensure that companies only get taxpayer dollars once they’ve actually delivered on their promises. Intel, like other potential recipients, hasn’t received any money yet.

Read More: With Chips Act Money Mostly Divvied Up, the Real Test Begins

In ongoing negotiations, Intel has grown frustrated with what it sees as the government dragging its feet and has urged officials to release funding faster, according to people familiar with the matter. Still, the company has resisted sharing certain information requested by US officials who are seeking to vet the viability of Intel’s manufacturing road map, said the people, who asked not to be identified because the talks are private.

The Commerce Department, which is in charge of Chips Act funding, declined to comment on the negotiations. Intel said in a statement that “we are making significant progress across our US projects in Arizona, New Mexico, Ohio and Oregon, and look forward to finalizing our funding agreement soon.”

The holding pattern follows a disastrous earnings report on Aug. 1 that ratcheted up pressure on Gelsinger. After the company posted a surprise loss and delivered a dismal outlook, Intel shares suffered their worst rout in decades and two major credit raters downgraded the firm’s debt to just a few notches above junk. The chipmaker also is slashing roughly 15,000 jobs — a troubling development for a company that is supposed to help bolster the US semiconductor workforce. Those cuts have drawn criticism from Capitol Hill.

Earlier: Biden Hails $20 Billion for Intel, Says Trump Lost Jobs to China

“We’ve been working hard to address the issues,” Gelsinger told investors at a conference last week. “Like everybody in the industry, we realize we have to operate efficiently with nimbleness, with urgency.”

Intel will evaluate its next steps at a board meeting in mid-September, according to people familiar with the matter. If the company lowers the ambitions of its US projects, the people said, its subsidy package would almost certainly change too.

The corporate turmoil risks turning a landmark public-private partnership into a political liability. During his March trip to Chandler, Arizona, President Joe Biden announced that Intel would get the largest award from the Chips Act, which earmarked a total of $39 billion in grants — plus billions more in loans and tax breaks — to boost domestic manufacturing of critical electronic components.

The watershed bipartisan law has seen some substantial success, helping to catalyze $400 billion in announced investments from industry leaders like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. The White House is confident in those commitments, spokesperson Robyn Patterson said in a statement, and will continue working to achieve the program’s national and economic security aims.

Around a quarter of the total private-sector pledge amount comes from Intel, which is also the sole intended beneficiary of a $3.5 billion program to make chips for defense and intelligence purposes. That makes its factory plans crucial to the broader Chips Act effort.

But — like all companies involved — Intel’s expansion will hinge on market conditions, not promises to politicians. The company has an established strategy of ramping up factory shell capacity, then outfitting facilities with the more expensive equipment portion subject to “clear product demand,” as Gelsinger recently explained.

Case in point: Back in 2012, former President Barack Obama delivered a speech at an Intel facility in Arizona that was slated to open the following year. Intel delayed the project and later touted it from Donald Trump’s Oval Office. That factory became fully operational in 2020, and Intel announced its current Arizona expansion in 2021.

“We recognize that we are operating in one of the most cyclical, intensely competitive industries in the entire world, and that dynamics are going to shift,” Mike Schmidt, who runs the Commerce Department’s chips office, said in an early August interview when asked about risks to the overall program. “We’ll have to be nimble in how we respond to that.”

Asked specifically about Intel, Schmidt said that the company “feels really comfortable with their US expansion plans and with the milestones we’ve aligned along with them.” Those benchmarks are spelled out in a so-called preliminary memorandum of terms, which is the high-level agreement that Biden celebrated in March.

The company is looking to finalize the deal and get its first grant disbursement as quickly as possible, arguing that it’s already made sizable investments and provided assurances about its overall road map in earlier negotiations, according to people familiar with the talks.

But while firms like Taiwan’s TSMC offer technology that’s widely regarded as the world’s best, Intel has struggled to convince industry officials and investors of its product capabilities. The chipmaker has said that some companies are exploring using its factories, including Broadcom Inc., MediaTek Inc. and Microsoft Corp., but none has gone into full production yet.

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Commerce Secretary Gina Raimondo encouraged executives at Nvidia Corp. and Advanced Micro Devices Inc. to consider manufacturing at Intel’s sprawling Ohio site, which could become the world’s largest chipmaking facility when it’s operational, people familiar with the matter said. Neither currently plans to do so.

Nvidia, which relies on TSMC and Samsung for its production needs, has said it’s in the very earliest stages of evaluating Intel as a potential supplier. AMD CEO Lisa Su has sidestepped questions on whether she would consider using Intel, answering that her company is happy with its current main supplier, TSMC. (Nvidia and AMD declined to comment.)

Beyond Ohio, Intel’s Chips Act award would support projects in Oregon, New Mexico and Arizona. The Arizona site, Intel’s current US manufacturing headquarters, is one intended location for the Pentagon’s chip program, called the Secure Enclave, according to people familiar with the matter. Secure Enclave is essentially a second, cutting-edge edition of a longtime US military strategy to identify and financially support so-called trusted foundries for less-advanced chips.

The economics are extremely challenging. Existing trusted foundries “incur significant costs to align their business with DoD requirements,” according to a new congressionally requested report from the National Academies of Sciences. Pentagon purchases frequently “cannot generate the return on investment these firms need to remain suppliers,” the report found.

The researchers urged the Pentagon to ease procurement requirements to maximize “access to the supply chain created by the Chips Act.” In other words, the military could buy advanced chips from US facilities owned by foreign companies like TSMC and Samsung. The Pentagon remains committed to relying on an American supplier for Secure Enclave, people familiar with the matter said, but some officials have had early conversations about additional options.

It’s been a headache for everyone involved — especially after the Pentagon in February scuttled an arrangement that would have had the Defense Department cover $2.5 billion of Secure Enclave costs, with Commerce handling the remaining share. Lawmakers then directed the Commerce Department to shoulder the full burden using Chips Act grant money, so the agency folded a portion of those new obligations into Intel’s $8.5 billion award, people familiar with the matter said.

That means a greater share of Intel’s money comes with military-sized strings attached, the people said, while emphasizing that nothing is set in stone. Intel, Commerce and the Pentagon declined to comment.

Commerce also had to scrap a planned program for commercial research and development, which forced them to deny an R&D funding application from Applied Materials Inc. for a Silicon Valley project that many officials viewed as a key part of the broader US undertaking. Efforts to boost the Chips Act by $3 billion, which would allow Commerce to restore that program, have stalled on Capitol Hill.