Opinion: Intel’s ‘smart capital’ is a warning from the past

Opinion: Intel’s ‘smart capital’ is a warning from the past

Opinion |
By Nick Flaherty

Intel has launched a Semiconductor Co-Investment Program (SCIP) that it says introduces a new funding model to the capital-intensive semiconductor industry.

While pitched as the first-of-its-kind, the deal is more of a warning of the impending downturn in the industry.

Despite the costs involved in semiconductor manufacturing, the margins at the peak of the cycle has always attracted investors from outside the industry. Back in 1995, that was Formosa Plastics of Taiwan, which formed memory maker Nanya Technology which is still in business. But as well as Formosa Plastics other firms with spare cash, including Coca Cola, were looking at investing in fabs.

The technology industry is awash with investors looking to place their cash. Intel says the definitive agreement with the infrastructure affiliate of Brookfield Asset Management, one of the largest global alternative asset managers, will provide a new, expanded pool of capital for building its fabs.

Intel says SCIP is a key element of its Smart Capital approach, which aims to provide innovative ways to fund its IDM 2.0 strategy as it heads into the trillion transistor era.

The companies will jointly invest up to $30 billion in the expansion of Intel’s Ocotillo campus in Chandler, Arizona. Intel is funding 51% and Brookfield funding 49% of the total project cost which at the launch was announced as $20bn. Intel will retain majority ownership and operating control of the two new leading-edge chip factories in Chandler, which will support long-term demand for Intel’s products and provide capacity for Intel Foundry Services (IFS) customers.

This is distinctly different from ST’s recent deal with GlobalFoundries, where the joint ownership reflects the level of wafers produced from the new fab at Crolles in France

The transaction with Brookfield is expected to close by the end of 2022, although whether that actually goes ahead as the headwinds of the downturn become more apparent.  

“This landmark arrangement is an important step forward for Intel’s Smart Capital approach and builds on the momentum from the recent passage of the CHIPS Act in the U.S.,” said David Zinsner, Intel CFO. “Semiconductor manufacturing is among the most capital-intensive industries in the world, and Intel’s bold IDM 2.0 strategy demands a unique funding approach. Our agreement with Brookfield is a first for our industry, and we expect it will allow us to increase flexibility while maintaining capacity on our balance sheet to create a more distributed and resilient supply chain.”

Sam Pollock, CEO of Brookfield Infrastructure, said, “By combining Brookfield’s access to large-scale capital with Intel’s industry leadership, we are furthering the advancement of leading semiconductor production capabilities. Leveraging our partnership experience in other industries, we are pleased to come together with Intel in this important investment that will form part of the long-term digital backbone of the global economy.”

The reason for the deal is clear in the small print, as the finance structure is expected to provide a $15 billion cumulative benefit to Intel’s adjusted free cash flow at a time when its results are struggling. Last year, 35% of Intel’s capital expenditures was spent on infrastructure.

Intel obviously hopes that the cash will unlock subsidies from the US government form the recently signed CHIPS Act, and from several foundry customers who indicated willingness to make advance payments to secure capacity.

“Intel’s Smart Capital actions provide Intel with greater flexibility, reduce overall gross capital needs and act as a tailwind to adjusted free cash flow and gross margin. We expect that SCIP, combined with the other pillars of our Smart Capital approach, will allow us to significantly accelerate our transformation and help deliver the more globally balanced supply chain the world needs,” said Zinsner.

Raising funds for large capital projects is a major challenge for other areas of the industry, particularly battery gigafactories. Northvolt has relied heavily on the European Investment Bank and customers, particularly Volkswagen, while Britishvolt has used a sale and leaseback approach for its site in the UK. Meanwhile Italvolt in Italy is also looking at how it funds its development.

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