Re-examining Intel's real intentions in acquiring Tower

In mid-February, Intel acquired Tower Semiconductor for $4.5 billion, bringing this wave of semiconductor mergers and acquisitions to a high profile. The news was sudden, but not surprising. In the eyes of many people, this was a necessary move for Intel to continue to implement its IDM2.0 strategy after the rumored acquisition of GlobalFoundries failed.

Looking at the current top 10 wafer foundry companies in the world, Tower may be the only foundry that has no competitive relationship with Intel itself, is geographically far away from the center of current international tensions, and does not trigger antitrust regulations. Although its market share is only 3%, Intel has no other choice.

However, with the official launch of the first wafer factory project in India in which Tower participated, combined with the current trend of US semiconductor companies withdrawing from China, Intel, which is caught in the center of the Sino-US technological competition, has gradually revealed its hidden purpose of using Tower to test the waters.

Intel's Dilemma: Being Sandwiched in the US-China Tech Competition 

The technological competition between China and the United States is heating up, and it is not just Chinese companies that are hurt. Intel, one of the semiconductor giants, is faced with the "impossible task" of returning the US semiconductor industry chain to its homeland on the one hand, and the Chinese market, which accounts for 26% of its revenue, on the other hand, making it the largest sandwich besides Qualcomm.

According to a report by the Wall Street Journal last August, Intel will jointly establish the RAMP-C program with IBM, Synopsys, and Cadence to lead "the establishment of a domestic commercial foundry ecosystem." According to the Pentagon agreement, the chips produced by the program can be used by military and commercial foundry customers.

Although Intel has a long history of cooperation with the U.S. Department of Defense, in the current situation, this further confirms Intel's role in reshaping the domestic semiconductor supply chain in the United States. For Intel, which is eager for U.S. government subsidies to rebuild its foundry status, this even has some meaning of a military order.

Obviously, the United States needs Intel to do more than just build a local supply chain. In November, foreign media reported that the Biden administration rejected Intel's plan to build a new wafer fab in Chengdu, China. Combined with Intel's sale of its Dalian, China NAND flash memory manufacturing plant and its entire NAND flash memory business to SK Hynix a year ago, Intel's strategy for the Chinese market seems to be quietly changing.

What is certain is that Intel will not give up the Chinese market. According to the "Revenue Ranking of the Top 20 US Semiconductor Companies in Mainland China in Fiscal Year 2021" released by the Aijiwei analyst team in May this year, Intel ranked second with US$21.141 billion, second only to Qualcomm. With Nvidia, AMD, TSMC and Samsung Electronics constantly challenging its position, the importance of the Chinese market to Intel is self-evident.

Image source: Aijiwei

For Intel, it is natural to keep constant in the face of change, but the tension of the current situation seems to be developing in a direction that exceeds expectations. Since the beginning of the year, according to Aijiwei, first Micron Technology disbanded its Shanghai team, and then Texas Instruments moved its Shanghai R&D team to India. For various reasons, American semiconductor manufacturers are showing a trend of withdrawing from China. Intel has also begun similar attempts.

I don't know if it's a coincidence, but after the news that the expansion plan in Chengdu, China was rejected by the US government in November last year, Intel announced in December last year that it would invest RM30 billion to expand its manufacturing capacity of advanced semiconductor packaging technology in Penang, Malaysia. The press conference was held on the day when US Secretary of State Antony Blinken visited Southeast Asia for the first time. Whether the US was behind Intel's move is a matter of speculation.

It is conceivable that if there are more such "coincidences", rumors of "Intel moving its industrial chain to Southeast Asian countries" will spread everywhere, which will inevitably have a certain impact on Intel's business in China. Moreover, given China's position in the global industrial chain, Intel is not sure whether it can find a replacement as the US government expects. Therefore, finding a roundabout and covert way to "test the waters" would be a better choice.

Acquiring Tower kills many birds with one stone: invisible endorsement, testing the waters

After all these considerations, Tower has become the best solution to Intel's multiple predicaments. On the one hand, as many analysts have previously believed, Tower, as a foundry, can directly integrate with Intel's IFS business to expand its foundry business, and its advantages in analog products and mature process capacity can directly make up for Intel's disadvantages. Given Intel's long history of investment in Israel, this is not surprising.

Image source: Internet

On the other hand, Tower can be the best spokesperson for Intel's layout in Asia and Europe. In the press release of the acquisition of Tower, Intel mentioned many times that the "geographic scope" of its foundry capacity is one of Intel's core considerations. As an Israeli foundry, Tower has been expanding its production capacity overseas for many years to seek orders from overseas customers because local demand cannot meet its survival needs.

According to Knometa Research's "2022 Global New Wafer Capacity Report", through the acquisition of Tower, Intel's production capacity in the United States will increase by 54,000 wafers/month (12-inch wafers), 63,000 wafers/month in Israel (6-inch and 8-inch wafers), and 85,000 wafers/month in Japan (8-inch and 12-inch wafers). In the future, it will also obtain 1/3 of the production capacity of the Italian 12-inch factory jointly owned by Tower and ST France.

Although its total production capacity is not outstanding in the current foundry market, its advantage lies in its rich geographical location. It can effectively ensure the security of the supply chain when the epidemic breaks out from time to time and the international situation is not very stable. Moreover, since its production capacity is concentrated in relatively tight mature processes and is aimed at industrial and automotive applications, it is also a very cost-effective deal for Intel.

In addition to the above benefits, Tower's strategy of building factories everywhere just meets Intel's current test-the-water and wait-and-see mentality. Han Xiaomin, general manager of Jiwei Consulting, said that for Intel, building factories overseas is a decision that needs to be carefully considered, both in terms of its own strategy and investment scale, and using Tower's factory building strategy to test the waters is undoubtedly a better choice.

At present, India will be Intel's first attempt in the name of Tower. In fact, as early as the beginning of this century, Intel took the lead in extending an olive branch to India, but because the Indian government has been slow to introduce semiconductor investment policies, the equipment shipped by Intel from the United States only stayed at the port for a few months, and the first Indian wafer factory plan was stillborn. Intel then turned its investment to mainland China.

Tower and Intel have similar experiences in investing in India. Its plan to build a wafer fab in India can be traced back to 2012. The chaotic policies of the Indian government also made Tower change its plans many times, but it never gave up its determination to build a factory in India. Now that India has finally launched the most comprehensive and ambitious Semicon India plan to date, Tower has finally got what it wanted.

Tower finally won the first wafer fab project in India. It is hard to say whether Intel was behind it. This suspicion also comes from some "coincidences". For example, just last month, the Semiconductor Industry Association (SIA), which represents the US chip industry, signed a memorandum of understanding with the Indian Electronics and Semiconductor Association (IESA). Prior to this, Intel CEO Kissinger visited India for the first time since taking office.