Intel Seeks Salvation In German Town Of Boom And Bust

Now the city, a two-hour drive west of Berlin, is plotting its latest revival, this time with the help of semiconductors. Intel Corp. announced in March that it would invest 17 billion euros ($16.3 billion) to build a cutting-edge production site in Magdeburg to make chips for both its own business and external customers, part of Europe’s ambitious attempt to lure global chipmakers back to the region. 

Like Magdeburg and its recurring cycles of boom, bust, and rebirth, Intel could do with a jolt. In recent years, rivals Taiwan Semiconductor Manufacturing Company and Samsung Electronics Co. have far outpaced Intel in making the most advanced chips, eating into the U.S. company’s market share and growth. 

Once the undisputed chip king, Intel now wants to jump back into the game. Aided by possibly billions in subsidies from governments in the US and Europe, Chief Executive Officer Pat Gelsinger has declared two ambitious — some say improbable — goals: beating its rivals at making the world’s most cutting-edge chips by 2025; and bringing more semiconductor production back to the US and Europe from Asia, now home to more than half of all output.

Skeptics abound. Intel is years behind in introducing new technology and has never succeeded in the business of making chips for other companies. There is also no guarantee that Intel will deliver what it promises on schedule, based on its recent track record of delays. Besides, the company’s record in Germany is mixed. Almost two decades ago, Intel was part of a $1.5 billion consortium for a chip factory in Frankfurt/Oder on the Polish border before writing off the project already under construction. 

Intel says it has “a lot of learnings from our prior foundry engagements and have been investing to drive improvements.’’ The company also said it’s optimistic it can deliver on its timetable and that governments will support its efforts.

The prospect of outside support for Intel’s effort is dimming. US politicians have been slow to approve funding lined up to spur chip manufacturing. In Europe, the European Union’s Chips Act plan risks being delayed, with countries like France pushing for the bloc to focus on mature chips needed now at car plants. 

“They’ve promised tens of billions; they haven’t actually spent it,” said Malcolm Penn, founder and CEO of Future Horizons, who tracks the semiconductor industry “They’ve promised to build a factory but not for another two to three years. They promised to do a lot of things, but promises are cheap.”

But Magdeburg is banking on Intel. The end of communism brought mass unemployment because Eastern German products were no longer competitive on a global stage. Things improved in the ensuing years, with the likes of Amazon.com Inc. and Samsung building warehouses on the outskirts of town starting five years ago. Still, unemployment in the region runs higher than the national average, as the five formerly Communist federal states continue to struggle to close the productivity gap more than 30 years after reunification. 

For decades, Magdeburg wanted to attract a big investment to restore its former glory. In the early 2000s, BMW considered building a new plant, but the car producer chose nearby Leipzig. Meanwhile, semiconductor companies amassed around Dresden, turning the neighboring region of Saxony into a chip hub. Elon Musk made a big splash erecting a Tesla factory on the outskirts of Berlin, where production recently started. Magdeburg looked on, waiting for another chance. 

When Intel first announced it was interested in building a new European factory, countries clamored for the opportunity, and Magdeburg was no exception. The city had a plot of farmland the city wanted to develop commercially Magdeburg also boasts good infrastructure, with its autobahn, train and waterway connections, as well as proximity to both Berlin and Dresden. 

On March 15, Magdeburg got its big moment, beating other German regions of Saxony, Bavaria and Mecklenburg-Vorpommern to become Intel’s new European home. 

“I was so proud,” Deputy Mayor Sandra Yvonne Stieger said. “This is our time now.” 

For now, the promised land is just flat farmland with the occasional rabbit appearing in the tall grass. Trees lining the future driveway were recently cut down to stumps. Officials are surveying the soil quality, and they still need to determine how best to get water to the plant. Then there are dozens of hamsters who’ve made the plot of land home that need to be relocated.

The city itself is also getting ready. One of the universities in Magdeburg is beginning a new nanotechnology course to serve as a pipeline for people to get educated on chips and then work at Intel. Rents will likely rise, but so will wages, a worthwhile tradeoff for most people in the city. Nobody wants to talk about Intel failing. 

But others in the chip industry are. Intel spent decades as the leading chipmaker, pushing the bounds of technology. Today, it’s fighting for a stake in the future following a series of missteps. Intel failed to scale its most cutting edge chip in 2016, leading to years-long delays. It wasted billions in multiple attempts to parlay its dominance in PC processors, at one point turning down Steve Jobs’ offer to make chips for the iPhone. When the company attempted to make chips for other companies, it required them to fit around Intel’s specifications and prioritized in-house demands. 

“There was this belief that Intel could never fail,” said Doug O’Laughlin, the founder of Fabricated Knowledge.

By the end of the 2010s, TSMC had taken Intel’s place as the leading chipmaker. The Taiwanese company had the most advanced machines from ASML, a customer-first approach and huge deals with Apple and Qualcomm. And most crucially, TSMC was seen as a far more reliable partner.

Last year, Gelsinger was brought in to turn Intel around. He’s now taking a huge bet to turn Intel into an advanced chip foundry. The company is spending roughly $30 billion a year to make this goal a reality. Magdeburg is the latest massive site the chipmaker is building after another major investment in Ohio and key expansions in Arizona and Ireland. The company also bought Tower Semiconductors for $5.4 billion this year which has a long history as a foundry business.

But the plans have spooked investors, who are increasingly worried that what was once a reliable stock could lose its , as Gelsinger spends big the next two years and might fail to deliver its most advanced chip in just a couple year’s time. “Every time he opens his mouth, the stock goes down,” Stacy Rasgon, a senior semiconductor analyst at Bernstein said. 

​​Intel has fallen well behind a massive run up in chip industry shares, underperforming the benchmark Philadelphia Stock Exchange Semiconductor Index in five of the last six years along the way losing its status as the most valuable publicly traded chipmaker.

“With a $1 trillion market opportunity ahead of us, we remain focused on executing the strategy we laid out at our investor day in February,’’ the company said in response to a request for comment, adding that it has met “a number of our key product and technology milestones over the past year.”

The biggest hurdle will be to change Intel’s reputation. The west is fixated on bolstering semiconductor production as the key tech components become increasingly important and geopolitical. Companies are eager for more competition to TSMC, and Qualcomm and Amazon indicated they could be the company’s first customers. Nvidia Corp. Chief Executive Officer Jensen Huang said he is interested in making chips with Intel, but the company has many hurdles ahead, as “being a foundry at the caliber of a TSMC is not for the faint of heart.” 

Gelsinger doesn’t have much choice. 

“What’s the alternative? It’s to lay down and die,” Rasgon said, cutting costs, buying back stock and managing earnings. “They turn into IBM and then you manage a sort of a slow, steady decline into irrelevancy.”

Intel has to be prepared to make a longterm transformation and fast if it wants to restore its former glory — just like Magdeburg.

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