The decision by US microchip giant Intel to withdraw from the acquisition of Tower Semiconductor (TASE: TSEM; Nasdaq: TSEM), an Israeli-US company named after the place in which it was founded, Migdal Ha’emek ("Tower of the Valley"), is first and foremost bad news for Israel. Intel will compensate Tower to the tune of $353 million, but the Israeli microchip foundry, which was supposed to lead Intel’s switch to becoming a manufacturer, will go back to being the small, niche company that it was beforehand, operating in the narrow field of analog components and sensors.
The first to feel the shockwaves of the chips war between the US and China will be residents of Migdal Ha’emek. US President Joe Biden has in the past year conducted a boycott of China’s civilian and military technology industries, including strict restrictions on exports of advanced semiconductors and semiconductor manufacturing equipment, in a bid to limit China’s military capabilities in cyber and artificial intelligence, which require sophisticated microprocessors.
The Chinese are not sitting back, and they are waging their own war against the US measures. So they refrained from giving regulatory approval to the Intel-Tower merger deal, which meant that, had Intel completed it, its activity in China would have been harmed. On the face of it, Intel could have gone full steam ahead with the deal, at the cost of foregoing the Chinese market, but that would not have been a realistic demand: China accounts for 27% of Intel’s revenue, and it would have been suicidal for the company’s CEO Pat Gelsinger to do something like that.
The US ban not only limits Intel’s ability to export its most advanced processors to one of its biggest markets; it also affects Nvidia, Intel’s great rival and a maker of graphics processors for artificial intelligence. Last month, Nvidia’s CFO told "Globes" that the battle between the US and China would have an impact on the entire industry in the long term.
But the Chinese didn’t like the Intel-Tower deal right from the start. US dependence on Intel had grown in the past year with the passage of the Chips and Science Act, which boosted US government investment in Intel by tens of billions of dollars. The presence of foundries in countries such as Germany, Poland, and Israel reduces US dependence om foundries in South East Asia. Furthermore, Tower itself competes with Chinese chip producers such as SMIC, and if it had grown stronger in China, that would have been liable to endanger the local analog chip industry.
Chinese curse or blessing?
It could be that, for Intel, the Chinese curse has become a blessing. In the past two years, Intel has built capabilities similar to those of Tower in-house. Perhaps in his heart of hearts Gelsinger wished for cancellation of the deal. He made it more than two years ago towards the end of the supply-chain crisis under pressure from investors as compensation for the failure of the deal to buy GlobalFoundries, which meanwhile has made an IPO independently.
Between the announcement of the acquisition and today, Intel’s cash reserves have dwindled. Last June, it had just $24 billion cash, when on the eve of the deal its cash amounted to $27 billion, so that its ability to carry out very large acquisitions while at the same time building fabs at a cost of $20 billion each has declined.
Anyone who read Intel’s announcement earlier this week of the expansion of its collaboration with Synopsys (Nasdaq: SNPS) would probably have understood which way the wind was blowing. Synopsys will help Intel produce microchips for, for example, its competitor Nvidia, using its existing design software.
Even before that, Intel announced a partnership with Arm, another Nvidia partner, and that its production division would become a profit center. In its most recent quarterly financials, Intel did not refer to the Tower deal at all, and it seems that the impending deadline did not bother investors, who raised its share price by more than 1%.
The truth is that the products of Tower’s foundries - fairly simple chips that are light years away from the core processors that Intel dreams of manufacturing - would be a business and technological weight on the back of the giant from Santa Clara.
In January 2022, when the Intel-Tower deal was signed, Gelsinger, a devout Christian from California, and Tower CEO Russell Ellwanger, a Mormon living in the Galilee, joked that not far from the birthplace of Jesus the gospel would go forth to the global microchip industry. It now looks as though the messiah has not come to their aid, although as far as the behavior of Intel and its share price are concerned, the deal died long ago.
Published by Globes, Israel business news - en.globes.co.il - on August 16, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.