Investor Essentials Daily

This company plans to break Asia’s hegemony over the semiconductors

Intel Corporation (INTC)
March 27, 2024

The semiconductor industry has experienced a rally, particularly in chip design companies like Nvidia (NVDA) and AMD (AMD). However, a significant shift is occurring with Intel’s move to become a major foundry player.

Traditionally, chip design and manufacturing were separate, with the latter often outsourced to Asian foundries, leading to a concentrated market dominated by Taiwan Semiconductor Manufacturing Company and efforts from China. This model presented geopolitical risks and limited domestic production capabilities outside Asia.

Intel (INTC), historically focused on designing and manufacturing its own CPUs, is undergoing a transformation to offer foundry services to external customers.

This shift, initiated with the IDM 2.0 strategy and Intel Foundry Services launch in March 2021, involves substantial investments exceeding $100 billion globally, including significant commitments in the U.S., Germany, France, Ireland, Italy, Poland, Spain, and a record investment in Israel.

This transformation comes as the long-term demand for semiconductors grows due to technologies like 5G, AI, and electric vehicles, suggesting a promising outlook for Intel if it can successfully scale its foundry operations.

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While the semiconductor industry has seen a strong rally in chip designers like Nvidia (NVDA) and AMD (AMD), one of the most significant ongoing transformations has flown under the radar – Intel’s (INTC) push to become a leading foundry player.

For decades, the chip manufacturing process known as fabrication or “fab” has been outsourced to specialized foundries. While companies like Nvidia and Qualcomm (QCOM) excel at chip design, the physical production of semiconductors is handled by foundries.

This foundry model has allowed chip designers to focus on innovation while relying on foundries to manufacture at scale. However, the foundry landscape has been heavily concentrated in Asia, primarily Taiwan and China.

Taiwan Semiconductor Manufacturing Company (TAI:2330) emerged as the undisputed foundry leader, capturing over 60% of the outsourced semiconductor manufacturing market. Meanwhile, China has invested aggressively to develop its own foundries like Semiconductor Manufacturing International Corporation (HKG:981).

This posed geopolitical risks and limited domestic chip production capabilities in other regions.

For decades, Intel focused internally on designing and manufacturing its own CPUs. However, the company is now undergoing a radical transformation to become a major global foundry player.

In March 2021, Intel launched its IDM 2.0 strategy and the Intel Foundry Services business to start offering fab capacity to external customers. This marked Intel’s big push into the foundry market.

Since then, Intel has committed over $100 billion to build new fabs and boost manufacturing capacity in the U.S. Intel obtained $19.5 billion in grants and loans from the federal government. The company also aims to acquire an additional $25 billion in tax incentives.

Additionally, the company has unveiled its plans to invest over $35 billion initially in the creation of a state-of-the-art semiconductor fabrication mega-site in Germany. Also, the company aims to set up a new research and development (“R&D”) and design center in France, as well as to enhance its R&D, manufacturing, foundry services, and back-end production capabilities in Ireland, Italy, Poland, and Spain.

Furthermore, Intel has confirmed a new $25 billion investment in Israel, which is called the largest ever made by a company in the country. As part of the deal, Intel has received a $3.2 billion grant from Israel’s government for the new chip-making plant.

These investments will help address concerns about the geographic concentration of chip production.

While short-term volatility in AI/data center spending makes headlines, long-term demand for semiconductors is surging. Technologies like 5G, electric vehicles, AI, and the metaverse will require exponentially more chips.

As a major new foundry competitor, Intel is well-positioned to benefit from the secular growth of semiconductors globally. If it can successfully ramp up foundry operations, Intel’s transformation may reshape the competitive landscape.

After years of delays, Intel seems back on track. Its massive investments and new IDM 2.0 strategy establish Intel as a potential global foundry powerhouse for the decades ahead. Only time will tell if it realizes the vision of competing head-on with titans like TSMC.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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