Intel Israel has asked several suppliers to halt work on the construction and expansion of its new Fab38 production plant in Kiryat Gat, which is set to be one of Intel's most advanced factories worldwide and the largest chip-making plant in Israel. Channel 12 News reported earlier this week that the American company informed several contractors in Israel to halt construction work, while reopening negotiations with other suppliers over the project budget. In the original timeline, construction of the plant was supposed to be completed in 2028, with the plant fully operational by 2035. But that timeline is now in doubt, even if the plant is completed according to the original plan.
Why is Intel postponing the plan?
Intel's suspension of the project has been widely reported in the Arab world, with the Lebanon-based Al-Mayadeen TV channel even attributing the halt to the current war.
But from Intel's reaction to the media and stock market announcements, it appears that the chipmaker is mired in a free cash flow crisis and is looking for financing solutions to realize the dream of its new factories, each costing tens of billions of dollars.
Intel is under pressure, making its efforts to build factories around the world difficult to achieve. The company is experiencing insufficient sales growth, increased expenses in financing factories and borrowing to build them, delays in approval of EU grants as well as increasing competition from Nvidia and AMD. All this hinders Intel's growth.
Over the past year, Intel's debt raising costs reached an all-time high of $8 billion, while free cash flow fell from a positive flow of $21 billion in 2020 to a negative flow of $14.2 billion in 2023. Debt expenses jumped Investments in equipment and factories rose from $9 billion in 2016 to $26 billion last year.
Irish Connection
Just last week, Intel announced it was selling 49% of the factory it is building in Ireland in Leixlip to Apollo Global for $11 billion. This is only the second time that the company has made a deal of this kind. In 2022, Intel received an investment from Brookfield Capital Management to build a new chip factory in Arizona.
“Intel's agreement with Apollo gives us additional flexibility to execute our strategy as we invest in creating the world's most resilient and sustainable semiconductor supply chain,” David Zinser, Intel's chief financial officer, said last week. “Our investments will be in leading capabilities in the US and Europe which is critical.” To meet the growing demand for silicon, as the global semiconductor market is expected to double over the next five years.
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Intel confirms additional $15 billion investment in Kiryat Gat
The Irish factory is nearing completion, and the money received from the deal will be transferred to Intel by the end of this month. Then Intel will be able to invest it in other places as well, such as Israel. However, the Intel-Apollo agreement also includes a promise that Intel will give priority to the Irish factory over other factories in choosing where to develop production.
Is the Israeli delay exceptional?
No, in fact, Intel has seen construction delays in most of its production plants around the world. Construction of its first factory in Germany, in the city of Magdeburg, near Berlin, has been repeatedly delayed, first because of a shortage of skilled workers to build the factory, then because of archaeological excavations, and most recently because of delays in approving EU grants. The need to remove “black soil,” which is mineral-rich soil used in agriculture. Construction of the station was supposed to begin in the first half of 2023, and will now not begin until at least May 2025.
Reuters reported that Intel is moving to cancel the construction of its factories and development centers in Italy and France, which were announced with the promise of obtaining grants from the European Union, in order to invest resources in building the factory in Germany.
Building chip factories in Western countries such as Germany, Ireland, the United States or Israel is an incredibly expensive business move, requiring resources that only wealthy tech giants have. That's why Intel helped promote the US CHIP Act, which Congress eventually passed, and Intel was the biggest beneficiary. Intel is scheduled to receive $10 billion from the US government to build factories in Arizona and Ohio.
In all likelihood, the construction of the new plant in Israel has been postponed and not cancelled. However, despite generous incentives offered by Israeli taxpayers, Intel did not announce its move clearly or transparently, and made vague comments about its future activities in Israel.
“Israel remains one of our key global manufacturing and R&D locations, and we remain fully committed to the region,” Intel said in a statement. “Managing large-scale projects, especially in our industry, often involves adapting to changing timelines. Our decisions are based on Business conditions, market dynamics and responsible capital management.”
What are the consequences of the state grant?
At this stage, Intel has not yet received a single shekel of the NIS 11 billion grant agreed upon for the new factory from the Israel Investment Authority. Under the terms of the state's grant agreement with Intel, it will receive government support only after results are demonstrated and goals are achieved. Intel will not receive significant payments until significant construction progress is made, employees are hired and the plant is up and running, which could take many years after the plant is built.
Published by Globes, Israel Business News – en.globes.co.il – on June 13, 2024.
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