Intel's outsourcing bombshell puts Israel investments in doubt

Intel chip

Intel CEO Bob Swan's declaration that 'we may no longer make it all ourselves' leaves a question mark against the chipmaker's future investments in Israel.

On Thursday night Intel Corp. (Nasdaq: INTL) CEO Bob Swan dropped a bombshell when he answered a question by saying that the chipmaker was considering outsourcing chip manufacturing. His answer that 'we may no longer make it all ourselves' contributed to the company's share price falling 16.24%. Such outsourcing already happens but only on the very margins of Intel's operations and certainly not on its most innovative technologies. So if Intel proceeds with such a decision, and there is no certainty that it will do so, it will be an admission of failure by Intel that it can no longer be at the forefront of technology.

The reason for Swan's outsourcing answer to a question was the statement in Intel's second quarter financial report that it is 12 months behind in manufacturing its advanced seven nanometer chips. So how does all this affect Israel, where Intel is the country's largest employer in the high-tech sector.

Intel currently produces 10 nanometer chips in Israel (among other things) and Swan declared at the teleconference after the publication of the company's second quarter results that the company plans increasing production of these chips. However, there is now a question mark regarding the new plant that Intel is currently building in Israel at an investment of NIS 40 billion and which will employ 1,000 people. Sources believe that the factory is due to include seven nanometer chip manufacturing although this has never been officially disclosed. But a source in Israel has insisted that Intel remains committed to its investment plans. Can this be relied on? It's too early to know.

Over the years, Intel has invested $22 billion in Israel. Every few years, Intel builds a new plant here and Israel is always among the final candidates for to build any innovative new Intel factory. All this of course costs the Israeli government money in grants with Intel receiving NIS 4 billion for the plant currently under construction.

The problem with Intel's outsourcing declaration is not this or that plant but what will be in the longer term. Intel won't transfer plants already operating to outsourcing but rather new plants in the future. There is even a big question mark about that. Even if Intel were to never build new factories in Israel and other countries, it would still take time until Israel's tech scene was to feel any major effect. Even in such a scenario, Israel would still be left with a large development center in Israel.

So should we start feeling under pressure about what could happen in another 10 years? Not really and not because such a scenario is necessarily positive but because it's difficult to say where the chip sector will be in another decade, and Intel's status in the industry was already somewhat shaken even before the latest announcement.

Intel said, "The company is committed to Israel and continues to invest in the country. Israel is one of Intel's global manufacturing and development centers with operations like the manufacturing plant in Kiryat Gat and R&D center in the field of computerization, communications and AI throughout Israel as well as the Mobileye headquarters in Jerusalem. Intel continues to invest in these activities."

Published by Globes, Israel business news - en.globes.co.il - on July 26, 2020 © Copyright of Globes Publisher Itonut (1983) Ltd. 2020

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