Intel Unveils New Funding Model to Enable Huge Chip Project

Chip giant Intel introduced a more flexible funding model for its highly capital-intensive project plans.

The global semiconductor shortage has wrecked production plans in a broad spectrum of industries, since chips are necessary to make smartphones, cameras, computers, cars, household appliances and so many other products.

For example, so far this year more than 3 million vehicles have been axed from automakers’ production schedules worldwide because of the microchip shortage, according to Automotive News. That figure in fact might be an undercount.

In addition, this year has been marked by the Russia-Ukraine conflict — Russia and Ukraine produce raw materials for chip production, Gartner reports. And covid-19 outbreaks in China prompted lockdowns there and hurt chip production.

On Aug. 9, President Joe Biden signed into law the Chips and Science Act of 2022, which allocates $53 billion in federal funding to enable manufacture of semiconductor chips domestically.

The U.S. produces only about 10% of the world’s chip supply “and none of the most advanced chips,” the White House said in a statement. “Instead, we rely on East Asia for 75% of global production.

“The Chips and Science Act will unlock hundreds of billions more in private sector semiconductor investment across the country, including production essential to national defense and critical sectors.”

Now, Intel (INTC) – Get Intel Corporation Report is partnering with an affiliate of an alternative-asset-management company to develop a $30 billion semiconductor fabrication project in Chandler, Ariz.

Joint Investment, New Funding Model

The Santa Clara, Calif., semiconductor giant and the Brookfield Infrastructure Partners subsidiary of Brookfield Asset Management  (BAM) – Get Brookfield Asset Management Inc. Report definitively agreed to fund the project, a statement says.

Intel called the project the Semiconductor Co-Investment Program, which “introduces a new funding model to the capital-intensive semiconductor industry.” 

The method enables Intel to draw on Brookfield’s capital pool to build out capacity.

The agreement calls for the companies to jointly invest up to $30 billion in Intel’s previously announced manufacturing expansion at its Ocotillo location in Chandler. Intel will fund 51% and Brookfield 49% of the total project cost. 

Intel will retain majority ownership and operating control of two new chip factories in Chandler, which will support long-term demand for its products and provide capacity for Intel Foundry Services customers.

The deal will allow Intel to tap into a pool of capital below its cost of equity while protecting its cash and debt capacity. 

Over the next several years, Intel said, the structure is expected to provide a $15 billion cumulative benefit to Intel’s adjusted free cash flow and is expected to add to Intel’s earnings per share during the construction and ramp phase. 

The transaction is expected to close this year.

Working With Governments

Intel said it is continuing to work with governments in the U.S. and Europe to advance incentives for domestic manufacturing capacity for leading-edge semiconductors.

In addition, Intel said Congress is making strides with the FABS Act, which will establish a semiconductor investment tax credit in the U.S.; and the European Chips Act has added 15 billion euros ($14.94 billion) to an existing 30 billion euros in public investments to build new infrastructure, among other advancements.

Last month, Intel posted weaker-than-expected second-quarter earnings, while cutting its full-year sales forecast, amid a pullback in demand for laptop and desktop computers.

For the year, Intel clipped its revenue forecast to between $65 billion and $68 billion, as softening demand, supply-chain disruption and runaway inflation continue to hammer personal-computer demand.

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