(Award-winning tech columnist Jon Markman publishes of Strategic Advantage, a popular daily newsletter about the digital transformation of business, entertainment and society -- and how to invest in it. Click here for a free two-week trial.)
Semiconductor giant Intel ( (INTC) - Get Report) is under siege from outsourcing, so its execs are turning to Washington for help. If the gambit works, investors should sell Intel shares into strength.
Intel chief Bob Swan published an open letter Monday to President-elect Biden urging a big investment in domestic chip manufacturing. The idea jibes with Biden’s American-made push.
There’s a catch, though: Making more chips in the United States will not help Intel shareholders.
According to a report from the Semiconductor Industry Assn., US firms currently account for 48% of worldwide sales. From chip designs and manufacturing equipment to the complex software used to refine routing instructions, companies headquartered here are the most innovative and profitable.
Pursuing those profits has pushed many domestic companies to outsource manufacturing to Asian chip foundries like Taiwan Semiconductor Manufacturing ( (TSM) - Get Report). The foundries do not make their own processors. Rather, they take on contracts to manufacture custom processors for firms that lack fabrication facilities.
TSM has invested billions in the sophisticated machines and processes, usually made by American firms, to produce these chips. In the process the company has won over fabless clients like Apple (AAPL), Qualcomm ( (QCOM) - Get Report) and Nvidia ( (NVDA) - Get Report).
However, the rise of fabless semiconductor firms has its pitfalls.
Outsourcing reduced the need for manufacturing capacity in the United States. Currently only 12% of semiconductors are made stateside. The pandemic and the trade war with China showed those supply chains might be in peril in a pinch, a potential national security issue.
On the other hand, design innovation has blossomed. Without the need to make big investments in hardware infrastructure, fabless companies have been able to iterate at a far faster rate than ever before. And they have built some remarkable chips.
The SIA report notes that Nvidia is renowned for its best-in-class graphics processors. And Qualcomm radio frequency chips are the gold standard. They have been adopted most of the world’s mobile handset makers.
Apple’s new M1 chip for its next generation laptop computers, was custom built by TSM. The processor is so advanced it performs better than comparable Intel units while getting twice the battery life.
M1 epitomizes Intel’s predicament.
The current state of the semiconductor industry works well for the most innovative firms. They don’t need or want what Intel is selling. Building more American capacity will not change that.
Regardless, Swan is arguing the United States is at a competitive disadvantage because there is no national semiconductor manufacturing strategy.
In his letter to President-elect Biden, Swan claims that a robust investment in manufacturing capacity will help make city and energy infrastructure smarter and more efficient, and lay the groundwork for building a 21st century workforce with a greater emphasis on science, technology, engineering and mathematics.
It’s all a bit dubious and self-serving, like billionaires asking big cities for billions to build privately owned sports stadiums.
Swan is pitching the president-elect on the benefit of Intel fostering the next generation of cutting edge technologies and all of the social benefits that entails. Unfortunately Intel is not at the vanguard of chip innovation.
The company missed the rise of mobile computing and now fabless companies are moving forward with cutting edge architectures made in TSM foundries that put Intel’s core business in jeopardy.
The Wall Street Journal reported in May that TSM managers plan to build a $12 billion manufacturing facility in Arizona.
Intel shares are down 21% in 2020. The stock trades at 10.1x forward earnings and 2.4x sales. Those metrics are going to appeal to many investors worried about the valuations of companies growing much faster.
My work suggests Intel could trade back into the middle $50s. However, this is a business longer-term shareholders should be looking to sell into strength.