Intel: The economy is bad right now, but we still need more fabs

Intel said it will continue building new chip manufacturing plants in the West despite a shrinking global economy because it's important to diversify supply chains and expand capacity for when it expects semiconductor demand to rebound.

The x86 giant reiterated its commitment to its multibillion-dollar manufacturing expansions in the US and in Europe through a Monday editorial written by Keyvan Esfarjani, the head of Intel's global operations.

While Esfarjani didn't explicitly say so, his editorial seemed geared towards skeptics who wonder why Intel is continuing with plans for big fab projects in Ohio and Germany when shortages of some chips have turned into gluts, as demand for electronics have cooled over the past several months.

After all, Intel is expected to be a major beneficiary of government subsidies from the US and EU, as well as regional governments, for its massive fab sites in Ohio and Germany. And the company's recent plunge in quarterly revenue likely has at least some wondering whether the new manufacturing plants will be a wise way to spend taxpayer money.

"Since we announced plans to build new semiconductor fab sites in Germany and Ohio, much has changed: geopolitical challenges have become greater, semiconductor demand has declined, and inflation and recessionary pressures are disrupting the global economy," Esfarjani wrote.

Esfarjani, a key spokesperson for Intel's manufacturing expansion plans, said it's important to "acknowledge the abrupt change in the environment" while continuing to invest in greater capacity.

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He gave two main reasons for the importance of expanding Intel's chip-making capacity. For one, the semiconductor industry needs to diversify the silicon supply chain by shifting production to the West from Asia, where most of the capacity for leading-edge chips is currently concentrated.

"This is not a challenge to be solved overnight – or even in a few years. Best-in-class semiconductor facilities – or fabs – take three to five years to build. And that's after you have the land, the construction team and the vision for where that capacity is most needed. We believe Europe and the U.S. are regions that can support and would benefit from stronger semiconductor ecosystems," Esfarjani wrote.

Intel also believes that the economy will rebound in due time and drive demand up for chips again, another important reason cited for expanding the company's fab footprint.

Esfarjani cited a recent report by the Semiconductor Industry Association — a US lobbying group backed by Intel and other chip companies — claiming that semiconductor demand will increase 5 percent every year until 2030. The report said the total addressable market of the industry will reach $1 trillion at the end of the decade, double today's demand.

Esfarjani did indicate that the progression of Intel's fab plans in Germany and Ohio will be dependent on how the economy evolves, saying the company will "time big expenditures to meet market needs." (We should note that before the US passed the CHIPS and Science Act, Intel said the "scope and pace" of its Ohio expansion depended "heavily" on federal subsidies unlocked by the bill.)

But even if Intel does make some adjustments for its new fabs, the company seems to believe demand will come back in a big way and justify massive spending on the part of Intel and Western governments:

Kevin Krewell, principal analyst at Tirias Research, told The Register that Intel doubling down on its commitment to expand chip manufacturing in the West is in recognition of the fact that chipmakers have to try and anticipate what demand is expected three to four years before a new fab goes online.

"Building the capacity now is planning for the future," he said.

Intel's expansion plans are also likely reflective of its confidence that the company's revitalized contract chip manufacturing business, Intel Foundry Services, will grow business significantly in the coming years. The foundry biz experienced a shakeup last week when Intel said that its leader will leave early next year, as we first reported.

"Intel does hope to gain additional customers for its foundry business, which would be above and beyond its internal requirements," Krewell said.

However, Krewell added, there is a risk that Intel and other chipmakers building new fabs over the next few years will lead to overcapacity. That's why it's prudent for Intel to moderate its spending in new plants and chip-making equipment when the economy slows down, according to the analyst.

"They probably don't anticipate making a radical adjustment to those plans. But if conditions deteriorate further, they may have to rethink those investments," he said. ®