Intel’s $7.9B subsidy deal comes at a high price for the chipmaker

Intel’s $7.86 billion subsidy agreement with the US government imposes strict conditions on the company’s ability to divest stakes in its chipmaking division if the unit becomes independent.

In a recent securities filing, Intel disclosed that it must maintain at least 50.1% ownership of Intel Foundry if the division is spun off as a privately held entity.

If the unit goes public and Intel is no longer the largest stakeholder, the sale of stakes to any single investor would be limited to 35%.

This follows Intel CEO Pat Gelsinger’s September announcement to spin off the company’s chip production division into an independent subsidiary aimed at securing independent funding and optimizing capital structure.

Earlier this week, the US Commerce Department finalized a $7.86 billion subsidy for Intel, reduced from the $8.5 billion announced in March.

This comes as Intel faces heightened scrutiny over its financial challenges, compounded by intensifying competition from AMD and Nvidia in the AI chip market and recent workforce reductions.

Challenges ahead for Intel

The sale restrictions tied to the subsidy underscore the US intention to reinforce domestic semiconductor production under the CHIPS Act.

“The subsidy definitely comes with strings attached and is designed to ensure accountability for the recipient,” said Neil Shah, VP of research and partner at Counterpoint Research. “In this case, it’s Intel, and if a majority shareholder in the future decides not to comply or pivots to a strategy that doesn’t align with the goals of the US CHIPS Act, it could create significant issues.”

The challenge for Intel is securing consistent capital to sustain and grow its foundry business while keeping pace with rival TSMC’s heavy investments.

With its core businesses in PCs and servers underperforming – once key contributors to funding R&D and fabrication infrastructure – Intel’s ability to remain competitive has come under strain.

“The only way to raise capital is to spin off and secure new investors through an IPO or other means, which would dilute Intel’s stake,” Shah said. “To stay competitive, Intel needs to invest tens of billions of dollars annually. These restrictions could leave Intel stuck unless they manage to renegotiate terms with the US government.”

If Intel fails to remain competitive, customers may shift towards competitors like TSMC. This could lead to enterprises becoming more dependent on infrastructure and devices built with chips primarily produced by TSMC, further strengthening TSMC’s market position.

This shift could drive up chip prices, diminishing the purchasing power of enterprises and their equipment suppliers. It could also negatively impact US efforts to achieve leadership in semiconductor manufacturing.

“While such restrictions could enhance resilience against global supply chain disruptions and strengthen the US semiconductor ecosystem, it might come at the expense of slower scalability,” said Manish Rawat, semiconductor analyst at TechInsights.

Implications for enterprises

For enterprise customers, the restrictions bring both challenges and opportunities, according to Rawat. Intel’s limited access to external investors and potential delays in scaling its foundry operations could raise supply chain reliability concerns during peak demand.

“This could create uncertainties for customers relying on Intel for advanced manufacturing to meet their future technology needs,” Rawat said. “Additionally, concerns may arise over the foundry’s long-term strategic direction. If Intel Foundry’s ownership structure lacks the flexibility to adapt to market conditions, enterprise customers could experience disruptions in semiconductor supply reliability, particularly if Intel struggles to keep up with demand.”

On the other hand, a US-centric Intel Foundry could boost confidence among enterprises prioritizing supply chain security and adherence to “buy American” policies amid escalating geopolitical tensions. “This shift could also strengthen the domestic semiconductor supply chain, providing significant benefits, especially for industries involved in critical defense and national security-related applications,” Rawat added.