The Lever - Intel Begs For A Bailout

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Intel CEO Pat Gelsinger tried to strong-arm Congress last week, telling CNBC that the semiconductor industry needs $52 billion in subsidies to remain competitive, or else major microchip companies won’t invest resources in the United States. But at the same time, Gelsinger’s company and its well-connected lobbyists are pushing Congress to allow it to potentially use the subsidies to put more money into its factories outside of the country.

Plus, there is nothing in the massive subsidy bill, which also includes a major tax break for chip manufacturers and could face a Senate vote as soon as Tuesday, that would require companies like Intel to actually use the money on domestic research and development. That means the companies could instead give the money to shareholders via dividends and stock buybacks. Just last week, Intel announced a quarterly stock dividend for its investors.

There is a good case to be made for federal support for more domestic semiconductor research and manufacturing — especially as most advanced chip manufacturing is centered overseas, thanks to offshoring by firms like Intel and foreign government support for the industry. Plus, global chip shortages have contributed to high inflation. But what is left of this particular legislation, known as the CHIPS Act, amounts to billions of dollars in giveaways to major corporations like Intel — with little guarantee that the subsidies will deliver the promised semiconductor manufacturing boom here in the U.S.

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“Do not go home for August recess until you have passed the CHIPS Act,” Gelsinger warned lawmakers on CNBC’s Squawk Box on Friday, “because I and others in the industry will make investment decisions. Do you want those investments in the U.S., or are we simply not competitive enough to do them here and we need to go Europe or Asia?”

Intel has been one of the bill’s staunchest supporters — and Gelsinger was even invited to President Joe Biden’s state of the union address to show his support for the subsidies. In that speech, Biden said that Intel was prepared to increase its investment in a new chip factory in Ohio from $20 billion to $100 billion, if only Congress passed the CHIPS Act.

Intel is now holding that factory hostage. Last month, Intel canceled a groundbreaking ceremony for the Ohio plant, saying it was delaying construction due to Congress’s failure to pass the subsidies.

Gelsinger told The Washington Post last week that he "will make a decision to delay our project in Ohio” if Congress doesn’t pass the CHIPS Act.

In addition to the $52 billion in direct subsidies for chip companies, a separate 25 percent tax break for chip manufacturing is also included in the current CHIPS Act.

The second tax provision could deliver $24 billion to the microchip industry over the next five years, according to the Congressional Budget Office. A version of this tax credit was included in the House-passed Build Back Better bill that died in the Senate last December, and it would have required tax credit recipients to pay a prevailing wage to workers building their facilities.

According to a Lever review of the current bill language for the CHIPS Act, which has been stripped down due to Republicans’ refusal to support a broader China competitiveness bill, the prevailing wage requirement is not included in the manufacturing tax credit.

The legislation, which will cost $76 billion in total, will not be offset by any new taxes.

Intel Doesn’t Want “Guardrails”

While Senate Majority Leader Chuck Schumer (D-N.Y.) has tried to sell the CHIPS Act as an investment in the United States’ semiconductor manufacturing capacity in the face of a global chip shortage, the bill as it exists is essentially a bailout to large chip manufacturers — namely, Intel.

Today’s semiconductor shortages can in part be attributed to U.S. chip companies offshoring manufacturing, and spending their profits on returning dividends to shareholders and buying back their own stocks instead of investing in research and development.

In the past decade, the four largest chip companies in the U.S., including Intel, spent nearly a quarter trillion dollars — over 70 percent of their combined profits — on manipulating their stock price and delivering cash to shareholders via stock buybacks.

Intel has continued to pay dividends to its shareholders even as Gelsinger has said publicly that the company needs government subsidies to invest in manufacturing. Gelsinger, who became CEO last year, has halted buybacks — although the company technically could, under a 2005 authorization from its board of directors, move “to repurchase up to $110 billion [of stock], of which $7.2 billion remained available” as of this spring.

Yet, Schumer has repeatedly declined to hold votes on amendments put forward by Sen. Bernie Sanders (Ind.-Vt.) to restrict companies that receive the subsidies from buying back their own stocks or paying out dividends to shareholders, as The Lever previously reported.

Meanwhile, former aides to Schumer and Sen. John Cornyn (R-Texas), two of the bill’s staunchest advocates, have been lobbying the Senate on behalf of Intel to pass the legislation.

Last year, Intel retained the firm Klein/Johnson Group — which was established by former Schumer aide Israel Klein and former Cornyn aide Matthew Johnson in 2020 — to lobby on the legislation. A second former Schumer aide, Brian Greer, is also lobbying for Klein/Johnson on behalf of Intel, according to federal lobbying records

Intel and other chip companies have warned that Europe and China have been much more willing to subsidize semiconductor manufacturing than the United States, which will influence their plans about where to build and expand.

But it’s not at all clear that the massive CHIPS Act subsidies would spur domestic investment. Not only has the industry wasted its profits on returning money to shareholders, rather than research and development, but Intel is also lobbying against a provision in the bill that would prevent companies that receive the subsidies from using them to invest in factories overseas.

“Intel and the Semiconductor Industry Association, a sector interest group, have lobbied to weaken so-called ‘guardrails’ in the CHIPS Act that could limit their operations in the world’s second-largest economy, according to three Capitol Hill sources with knowledge,” Politico reported Monday. “The rules, which are still being negotiated, could prevent companies that receive funding from the bill from building or expanding advanced semiconductor facilities in China.”

Meanwhile, smaller chip companies that design but do not manufacture chips fear they could be crowded out by the handful of large companies that already dominate the market, including Intel and Texas Instruments.

Reuters reported on Monday that “a rift had emerged last week within the chip industry itself, with some players concerned the final language of the legislation would provide disproportionate support to manufacturers like Intel while doing little to support chip designers like Advanced Micro Devices Inc., Qualcomm Inc., and Nvidia Corp.”

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