At a time when companies are abandoning Israel, US chip maker Intel plans to expand its investment here: the Ministry of Finance announced yesterday that it had reached an agreement with the company whereby it will upgrade the fab currently under construction in Kiryat Gat and double its area. Two years ago, during a visit by CEO Pat Gelsinger in Israel, Intel announced that it would invest $10 billion in the new fab. The Ministry of Finance has now announced that the company has committed to investing a further $15 billion.
In fact, this is the expansion of a deal that started out in 2019 under Moshe Kahlon as minister of finance. At that time, the construction of a fab was approved at an investment of NIS 37.5 billion, with the state providing a grant of NIS 4 billion. Altogether, Intel will invest NIS 90 billion in building the fab, the increased amount arising from the higher costs of semiconductor production processes than in the past.
In exchange for the higher investment, Intel will receive a government grant of $3.12 billion (NIS 11.1 billion), the highest grant ever paid by the State of Israel to a private sector company. It represents 12.5% of the total investment, and will be paid by the Israel Innovation Authority in stages, in accordance with employment and production targets.
For the sake of comparison, in 2014, when Intel previously decided on building a new fab in Israel, it undertook to invest NIS 23.5 billion, in return for a grant of NIS 1.7 billion, or 7% of the total. Intel has, however, agreed to a rise in the companies tax rate that will apply to it from 5% to 7.5%. This rate applies to Intel’s fabs, and not to its development centers, which will continue to pay 12%. Until 2011, Intel paid a higher rate of companies tax on its fabs, of 12%, so even if there is a rise now, the taxation rate is still low by comparison with the past.
In any case, so far there is no contract, but only an agreement in principle which Intel has not officially confirmed. Intel also has its own considerations in choosing to upgrade production facilities. It tends to upgrade existing fabs, which it has done in the past in the case of previous fabs built in Jerusalem and Kiryat Gat.
For the Ministry of Finance and the Ministry of Economy and Industry (of which the Israel Innovation Authority is part), the agreement with Intel is an achievement at a time when large companies such as Electronic Arts, Dropbox, and Uber are pulling out of Israel. The grant is, however, conditional on meeting employee hiring targets that have not been published. In the past, Intel said that the new fab, due to commence operations in 2025, would employ about 7,000 people in its full configuration.
There is no doubt that the new fab will lead intel to take on new people, but there is a question mark over the size of the company’s workforce in Israel as a whole, which has not grown in recent years, and in fact shrank by about 300 last year.
Intel surprised
The Ministry of Finance’s announcement about the upgrading of the fab took Intel by surprise. It was released immediately after the weekly cabinet meeting, in the morning hours in Israel yesterday, before the company’s management in the US could respond.
It will be interesting to see how Intel’s management will react to the Ministry of Finance and the Ministry of Economy and Industry attributing to themselves the achievement of "$25 billion for a new fab" which, as mentioned, is not new. The announcement was made after the heads of the Ministry of Finance Budgets Division updated Minister of Finance Bezalel Smotrich and Prime Minister Benjamin Netanyahu.
Intel Israel stated in response: "Our intention of expanding our production capacity in Israel is motivated by our commitment to meeting future production needs and supporting Intel’s IDM 2.0 strategy (integrated device manufacturing, i.e., manufacturing products designed both by Intel and by other companies. A.G.), and we appreciate the continued support of the government of Israel."
Global strategy
In recent years, Intel has suffered from a substantial gap between it and its competitors in the development and production of microchips. The company came to the conclusion that the structure under which it had been operating, of developing and producing chips for itself, had become expensive and inefficient, and had also led to several failures in chip design and manufacture.
With the acquisition of Israeli foundry Tower Semiconductor, which has still not been completed, Intel announced a new business strategy that would turn it into a chip manufacturer open to producing chips for other companies. In the future, Intel hopes, it will be able to produce for leading chip developers such as ARM, Qualcomm, and even Nvidia, Apple, and Amazon, with which it currently competes.
The demand exists. The giant companies are currently largely dependent on foundries in East Asia, chiefly TSMC in Taiwan and Samsung in South Korea, which exposes the West to political risk, in the event of a confrontation between the US and China. The US administration therefore promoted the CHIPS and Science Act in Congress last year, allocating $52 billion in subsidies, plus tax credits, to encouraging chip makers to transfer semiconductor research, training and manufacture to the US. Intel, for example, has committed to build new facilities in Ohio and Arizona, while TSMC and Samsung are building facilities in Arizona and Texas.
Just at the end of last week, it was reported that Intel would also invest billions of dollars in Europe. The company is not betting on one site, but spreading its investments in all the Western countries in which it operates. According to the German press, the German government is close to a deal with Intel whereby it will raise its subsidy for the construction of a new fab in Magdeburg to €10 billion, over €3 billion more than it had previously committed to, out of a total investment of €20 billion (about NIS 78 billion).
On Friday, Intel announced that it would invest $4.6 billion in a new semiconductor chip assembly and testing facility near Wroc?aw in Poland.
Published by Globes, Israel business news - en.globes.co.il - on June 19, 2023.
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