Intel’s Plan to Farm Out Production Could Be Big Blow to Israel

U.S. company’s Kiryat Ata chip plant accounted for 12.5% of Israeli tech exports last year

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An Intel logo is seen at the company's offices in Petah Tikva near Tel Aviv, July 25, 2018.
An Intel logo is seen at the company's offices in Petah Tikva near Tel Aviv, July 25, 2018.Credit: Nir Elias / REUTERS
Sagi Cohen
Reuters

In a move that could have profound implications for the Israeli economy and high-tech industry, the U.S. chipmaker Intel on Thursday signaled it may give up manufacturing its own components after falling far behind schedule developing its newest technology.

CEO Bob Swan did not outline a plan for outsourcing production, but such a move could include the company’s giant fabrication plant in Kiryat Gat south of Tel Aviv.

Intel is by far Israel’s biggest tech manufacturer and employer. Its payroll numbers 13,750, most of its employees working in research and development but about 4,900 employed in manufacturing. According to the company, between subcontractors and suppliers, it is responsible for some 53,000 jobs in Israel.

In addition, the Intel plant exported $6.6 billion of chips in 2019, accounting for 12.5% of Israel’s high-tech exports and 1.6% of gross domestic product.

The news of Intel’s outsourcing plan comes as the company, for decades the unchallenged industry semiconductor leader, admitted it is falling behind rivals. Its new seven-nanometer chip technology was six months behind schedule. As a result, Intel may pay other manufacturers to produce its chip designs.

“We’re going to be pretty pragmatic about if and when we should be making stuff inside or making outside, and making sure that we have optionality to build internally, mix and match inside and outside, or go outside in its entirety if we need to,” Swan said on a call with investors.

The news caused shares of the Santa Clara, California-based company to plunge 16.2% to end at $50.59 on Friday in New York.

Other U.S. chip makers long ago shut or sold their domestic plants, retaining their design capabilities and farming out manufacturing of components to others, mostly Asian companies.

Entrance to Intel facilities in Kiryat Gat, Israel. Credit: Eliyahu Hershkovitz

Intel had bucked the trend, arguing that designing and manufacturing its own chips for personal computers and servers gave it a lead over rivals. But the model has frayed in recent years. Last year the company launched a new generation of processors with 10-nanometer technology after years of delays.

Intel remains the top supplier for processors for PCs and data centers, but Samsung, Nvidia and Taiwan Semiconductor Manufacturing Company have successfully challenged the logic of Intel’s business model.

Analysts said that moving away from that model would strengthen Intel’s smaller rival, Advanced Micro Devices, whose stock surged 16.5% to close at $69.40 on Friday.

U.S. shares of Taiwan Semiconductor Manufacturing Company, the world’s largest contract chip manufacturer, jumped 9.7% to $73.90. Intel’s potential surrender in manufacturing means one less competitor for TSMC, and a potential new customer.

“The delay of its seven-nanometer roadmap timing will create even more headwinds for Intel as its risk increased probability of further share loss to AMD and to other architecture like Arm in both its client and data center markets in the next two to three years,” said Kinngai Chan, an analyst at Summit Insights Group.

Although analysts who follow Intel related mainly to the company’s outsourcing production from its U.S. plants, the same fate may await the Kiryat Gat facility.

The plant has recently been upgraded to produce 10- and 14-nanometer chips. At the start of 2019, Intel announced a program to expand the plant at a cost of 40 billion shekels ($11.6 billion at current exchange rates), for which it would get financial assistance from the Israeli government totaling more than 3 billion shekels.

The aid is expected to be provided over a 10-year period starting in 2022, paid out as the expansion plans proceed and Intel meets its commitment to add another 1,000 jobs to its payroll.

However, since the initial announcement Intel has not made any follow-up statements about the plan and admits that it may undergo changes depending on its business needs. Media reports have said the expansion may be delayed.

On the other hand, Intel is continuing to expand its Israel R&D operations, including its acquisitions of self-driving technology company Mobileye and the artificial intelligence chipmaker Habana Labs.

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