This article first appeared in Forum, The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024
On Sept 16, Intel CEO Pat Gelsinger wrote to his staff on how to meet the headwinds facing Intel, including specific comments on Intel Malaysia operations. The key moves involved: (a) spinning off its foundry business which incurred losses of US$2.8 billion (RM11.8 billion) in the second quarter alone as an independent subsidiary; (b) a strategic collaboration with Amazon Web Services (AWS), with co-investment in custom chip designs, such as an AI fabric chip for AWS on Intel 18A, a custom Xeon 6 chip on Intel 3, including designs based on Intel 18A, Intel 18AP and Intel 14A chips; (c) announcement of awards valued up to US$3 billion in direct funding under the CHIPS and Science Act from the US government; and (d) continued consolidation and restructuring to deliver US$10 billion in cost efficiencies, which included laying off 15,000 staff by the end of the year.
In terms of production by geography, Intel will continue to invest in wafer fab projects in the US, whereas in Europe, projects in Poland and Germany would be delayed by approximately two years. “Malaysia remains an active design and manufacturing hub through our existing operations. We plan to complete the construction of our new advanced packaging factory in Malaysia but will align the start-up with market conditions and increased utilisation of our existing capacity,” Gelsinger said.
Intel’s restructuring occurs within a buoyant semiconductor market condition, where the latest industry statistics show that global semiconductor industry sales hit US$51.3 billion in July 2024, an increase of 18.7% compared with July 2023. The Americas market experienced particularly strong growth in July, with a year-on-year sales increase of 40.1%.
As McKinsey identified in its 2020 review, the semiconductor industry is dominated by a few top players who almost monopolise specific chips in certain sectors, such as Intel dominating the PC market, Qualcomm chips in the smartphone market, TSMC manufactures chips at 10nm or below, ASML produces the bulk of advanced lithography equipment, Samsung produces memory chips and Nvidia dominates the graphic cards market. Once a company achieves leadership in manufacturing and research and development (R&D) through intellectual property rights protection, it not only wins a dominant share of that market sector but it then enjoys, through economies of scale, lower costs and increasing competitiveness.
Consider fab construction. The cost of building and equipping an advanced semiconductor production facility with 5nm chip output now runs about US$5.4 billion — more than three times the US$1.7 billion required for a fab with 10nm production lines. The high costs of building and running these fab plants mean that asset-heavy vertically integrated companies like Samsung and Intel have a high asset base. Fabless producers like Nvidia, Qualcomm and so on, which outsource their production to TSMC, concentrate on software and chip design and accordingly have a smaller asset base and higher revenue.
Although Intel’s wafer fab projects have consumed over US$120 billion in asset investments, its revenue lags behind some of its key competitors. Samsung generates almost four times more revenue than Intel, at US$209 billion. In addition, Intel’s revenue trails behind specialised competitors like Nvidia and TSMC. In terms of market cap, Intel’s current market valuation of US$91 billion is no longer in the ranks of the top 10 semiconductor companies globally. With a slide in share prices, the employee or management share options are worth less than before, which means that attracting or retaining top talent through share option incentives would be less effective than for companies whose share prices are still rising.
German semiconductor Infineon, which has just invested almost US$8 billion in building a new fab plant in Malaysia, saw its revenue growth averaging 18% between 2020 and 2023 while market cap grew 8% per annum on average, both higher than Intel’s growth.
The separation of Intel’s foundry business into an independent subsidiary means that Intel is moving towards a fabless model. By collaborating with tech giant Amazon in chip design and production for Amazon’s specific needs, Intel has now recognised that it needs to sharpen its manufacturing processes and design capabilities, in one sense operating similarly to TSMC’s collaboration with Apple. These large-cap tech giants, with market valuations of more than US$1 trillion, can afford to co-share the high investment with Intel for these specialist chips.
One of the reasons why the semiconductor market is still booming is due to the rise of artificial intelligence (AI), which requires huge data centres to crunch the Large Learning Models. Moreover, as geopolitical tensions increase, higher defence spending means that the demand for smaller, faster and specialist chips with high memory for specific military uses will remain strong.
The demand for chips will continue to increase by quantity, as will the supply, but as the global semiconductor supply chain begins to decouple, when China begins to design and manufacture its own chips, the risk is that existing large American, European, Japanese and South Korean companies will face losing market share in the China market to Chinese domestic chipmakers. The Chinese market is already the world’s largest consumer of semiconductors, purchasing more than 50% of the chips manufactured globally. At the same time, China has also been the biggest buyer of semiconductor production equipment. One in two of ASML’s lithographic machines were sold in China in the second quarter of 2024. Further curbs or sanctions by the US on ASML sales to China would hurt ASML sales. Lower sales with high fixed asset and R&D costs mean that chip and production costs in a decoupled semiconductor market would inevitably rise.
Assembly test and packaging manufacturing used to be a high-cost and low-margin business which was offshored or outsourced to Asian countries. Penang was the first offshore assembly plant for Intel, and Malaysia’s semiconductor strategy goal is also set to make the country one of the top overseas advanced 3D packaging facilities.
We are now seeing different multinationals, as well as Chinese and other investors, coming to Malaysia to build data centres as well as new advanced packaging facilities. Domestic advanced packaging companies and semiconductor equipment makers will have to continue to invest in R&D and collaborate with foreign partners in order to maintain a competitive edge in the global semiconductor ecosystem.
This is both an exciting phase of market development, fraught also with uncertainties. One thing is for sure — the funding costs of the semiconductor market will continue to rise, meaning that only the tech giants with big market caps or governments with deep pockets will be able to stay in the game of the high tech, high stakes semiconductor market. There are also market niches where smaller and more nimble players can survive or even thrive. That’s the core business of private equity and more speculative tech-based stock markets.
Tan Sri Andrew Sheng writes on Asian global issues. Loh Peixin is a research associate at the George Town Institute of Open and Advanced Studies, Wawasan Open University. They are engaged in a major study of the tech industry in Penang.
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