Stock of the week: Intel
If there’s one thing the pandemic showed, it’s how reliant Western nations are on Asian production hubs. Especially for semiconductors and key computer chips.
The car industry took a massive Covid hit and production still hasn’t recovered from the chip shortage. Last month, UK car production was down 41% compared to February 2021. The shortage is expected to continue well into 2023.
It’s not just cars either. Computer chips are increasingly used in everything, and with 5G rolling out around the world bringing the Internet Of Things closer to reality, there’s no reason to expect chip demand to subside.
This chart tells the story:
Intel was dominant. The competitors progressed, then caught up to and surpassed the leader. The general assessment is that Intel wasn't innovating quickly enough. Digging a little deeper, it was probably a combination of factors.
Such is the pace of innovation in the industry, Intel got caught between protecting their market share of existing chips and the need to innovate and grow at the same time.
Pre-pandemic, the company was increasingly outsourcing production to TSMC & Samsung just to keep up with demand.
Outsourcing production to Asia has been a trend of the past thirty years. Production was heavily subsidised in Asia but not in the West. That trend might be reversing. And Intel is trying to benefit.
As the White House noted in this statement:
“The United States used to lead the world in global semiconductor manufacturing. But in recent decades, the U.S. lost its edge — __our share of global semiconductor production has fallen from 37 percent to just 12 percent over the last 30 years.__”
Which is why the US government wants to pass the $52 billion CHIPS act to incentivise more investment in the domestic chip sector.
Commerce secretary Raimondo called the situation “urgent”, adding
"We have to decrease our dependence on other countries including Taiwan on chips and the way to do that is to make more chips in America."
Intel has already announced plans to invest $20 billion to build two new mega fabs in Ohio. Intel CEO Gelsinger says that could grow to eight mega fabs and an investment of $100 billion "assuming support from the CHIPS Act,"
Intel has also announced plans for a €17 billion production facility in Magdeburg, Germany. Once again, government support is in the picture. Bloomberg reports that Germany is looking to grant more than €5 billion to Intel to support the initiative.
The EU passed their own €45 billion Chips act in February with the goal of producing 20% of global chip supplies by 2030.
Intel CEO Gelsinger says “The EU Chip Act and the U.S. Chips Act are designed to essentially level that playing field”.
Which means the West has joined Asia in subsidising this key industry, reducing the competitive edge of Asian production. Intel will be hoping they can rediscover the success (and market share) of the prior decade.
Not investment advice. Past performance does not guarantee or predict future performance.
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