Intel cash problems causing pause in new Israeli plant

Intel plant in Kiryat Gat credit:  Intel
Intel plant in Kiryat Gat credit: Intel

The US chipmaker is struggling to finance the Kiryat Gat Fab38 production plant, despite an NIS 11 billion Israeli government grant.

Intel Israel has told several suppliers to halt work on building and expanding the new Fab38 production plant at Kiryat Gat, which is planned to be one of Intel's most advanced plants worldwide and the biggest chip-making factory in Israel. Channel 12 News reported earlier this week that the US company had informed several contractors in Israel to stop construction work, while with other suppliers it has reopened negotiations about the project's budget. In the original timetable, construction of the plant was meant to be completed in 2028, with the fab operating at full capacity by 2035. That schedule is now in doubt, even if the plant is completed according to the original plan.

Why is Intel postponing the plan?

Intel's suspension of the project has been widely reported in the Arab world and the Lebanese-based Al Mayadeen television channel even attributes the halt in work to the current war.

But from Intel's reaction to the media and stock exchange announcements, it seems that the chip maker is mired in a free cash flow crisis and is seeking financing solutions to realize the dream of its new plants, which each cost tens of billions of dollars.

Intel is under pressure, which makes its efforts to build plants around the world difficult to achieve. The company is seeing insufficient growth in sales, increasing expenses in financing factories and taking on debt to build them, and delays in the approval of EU grants as well as growing competition from Nvidia and AMD. All this is inhibiting Intel's growth.

Over the past year, Intel's debt raising cost reached an all-time high of $8 billion, while free cash flow fell from a positive flow of $21 billion in 2020 to a negative flow of $14.2 billion in 2023. Debt expenditure has jumped from $9 billion investment in equipment and plants in 2016, to $26 billion last year.

The Irish connection

Only last week, Intel announced that it is selling 49% of the plant it is building in Ireland in Leixlip to the Apollo Global for $11 billion. This is only the second time ever that the company has undertaken a deal of this kind. In 2022, Intel received an investment from Brookfield Capital Management for construction of a new chip plant in Arizona.

Last week Intel CFO David Zinser said, "Intel’s agreement with Apollo gives us additional flexibility to execute our strategy as we invest to create the world’s most resilient and sustainable semiconductor supply chain. Our investments in leading-edge capacity in the US and Europe will be critical to meet the growing demand for silicon, with the global semiconductor market poised to double over the next five years."

The Irish plant is close to completion, and the money received from the deal will be transferred to Intel by the end of this month. Then Intel will be able to invest it in other places as well, such as in Israel. However, the Intel-Apollo agreement also includes the promise that Intel will give priority to the Irish factory over other factories in choosing where to advance production.

Is the Israel delay exceptional?

No. In fact Intel has seen delays in the construction of most of its production plants around the world. The construction of its first factory in Germany, in Magdeburg, near Berlin, was repeatedly delayed, firstly due to a lack of skilled workers to build the plant, then due to archaeological excavations, and recently due to a delay in the approval of EU grants and the need remove "black soil," mineral-rich soil used in agriculture. Construction of the plant was supposed to begin in the first half of 2023, and will now not begin until at least May 2025.

"Reuters" reports that Intel is inclined to cancel building its factories and development centers in Italy and France, which were announced with the promise of receiving EU grants, in order to invest the resources in building the factory in Germany.

Building chip factories in Western countries such as Germany, Ireland, the US or Israel is an incredibly expensive business move, which requires resources that only cash-rich tech giants possess. This is the reason why Intel helped promote the US Chip Law, which was eventually passed by Congress, with Intel the biggest beneficiary. Intel is due to receive $10 billion from the US government to build plants in Arizona and Ohio.

In all likelihood building the new plant in Israel is being postponed and not canceled. However, despite the generous incentives provided by Israeli taxpayers, Intel has not communicated its move clearly or transparently, providing vague comments about its future activities in Israel.

Intel said in a statement, "Israel continues to be one of our key global manufacturing and R&D sites and we remain fully committed to the region. Managing large-scale projects, especially in our industry, often involves adapting to changing timelines. Our decisions are based on business conditions, market dynamics and responsible capital management."

What are the consequences regarding the state grant?

At this stage, Intel has not yet received even one shekel of the NIS 11 billion grant agreed for the new plant from the Israel Investment Authority. Under the terms of the state's grant agreement with Intel, it will receive the government support only and after it demonstrates results and meets targets. Intel will only receive milestone payments after significant progress has been made in the construction, after employees have been hired and the plant begins operations, which could be many years after the plant is built.

Published by Globes, Israel business news - - on June 13, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Intel plant in Kiryat Gat credit:  Intel
Intel plant in Kiryat Gat credit: Intel
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