Intel closes chip deal with Amazon as foundries split and plants shut down

(Bloomberg) — Intel Corp. has made a series of announcements in the past 24 hours to prove that the turnaround at the struggling chipmaker is beginning to bear fruit.

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Chief among them: The company struck a multibillion-dollar deal with Amazon.com Inc.'s cloud unit Amazon Web Services to jointly invest in a custom AI semiconductor; new factories in Germany and Poland are on hold; the company could receive up to $3 billion in U.S. government grants to make chips for the military; and it is converting its struggling manufacturing business, or foundry, into a wholly owned subsidiary.

The news followed an Intel board meeting last week where executives outlined ways to conserve cash while keeping CEO Pat Gelsinger's long-term turnaround plan on track. The CEO's efforts depend on transforming Intel into a foundry, but the Santa Clara, California-based company has been slow to add customers. A high-profile customer like Amazon would be a notable achievement.

Intel shares rose as much as 4.8 percent after trading began on Tuesday. They had fallen 58 percent this year and closed at $20.91 on Monday.

Gelsinger, who launched a bold comeback for Intel in 2021, has had to scale back some of his ambitions in the name of efficiency. Faced with falling revenues and mounting losses, the company last month announced plans to cut 15,000 jobs, make $10 billion in cost savings and suspend Intel's dividend payment. Now he's going even further, reining in expansion plans, especially abroad.

Construction projects in Poland and Germany will be paused for about two years, depending on market demand. Another project in Malaysia will be completed but will not come into operation until conditions permit, Intel said.

The postponement of the German factory represents a setback for the European Union's semiconductor ambitions and is likely to reignite controversy in Berlin over the use of the 10 billion euros ($11 billion) in earmarked subsidies.

Although Intel is freezing work on new factories in Germany and Poland, the company says it is sticking to its US expansion in Arizona, New Mexico, Oregon and Ohio.

The move to separate Intel's foundry operations from the rest of the company is intended to convince potential customers – some of whom compete with Intel – that they are dealing with an independent supplier. Bloomberg had previously reported that the company was considering this option.

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“We still have a lot to learn when it comes to becoming a foundry,” Gelsinger said in an interview. “I need a lot of customers.”

Intel also plans to accelerate $10 billion in cost savings and focus its products more on AI computing, an area where rival Nvidia Corp. excels. And Intel hopes to reduce its global real estate by about two-thirds by year-end.

In addition, the company reiterated its plans to sell part of its stake in semiconductor maker Altera Corp. to private equity investors. The company, which Intel bought in 2015, was spun off from its operating business last year with the goal of taking it public.

Amazon Web Services is the largest provider of cloud computing and could help boost confidence that Intel can compete with companies such as leading semiconductor maker Taiwan Semiconductor Manufacturing Co. AWS has used Intel processors over the years but is increasingly focusing on its own designs – the very products that Intel may now help produce.

The two companies will jointly invest in a customized artificial intelligence semiconductor – a so-called fabric chip – in a “multi-year, multi-billion dollar framework,” a statement said Monday. The work will be based on Intel's 18A process, an advanced chipmaking technology.

“Today's announcement is great,” Gelsinger said of the deal on Monday. “This is a very sophisticated customer that has very sophisticated design capabilities.”

Microsoft Corp., another major cloud computing provider, announced plans in February to use Intel for some of its own chips.

In another win, Intel announced Monday that it is eligible for up to $3 billion in U.S. financial aid to make chips for the military. The project, called “Secure Enclave,” aims to ensure a steady supply of cutting-edge chips for defense and intelligence purposes. The news helped its shares rise 6.4 percent in regular trading Monday.

The Secure Enclave contract is separate from a potential $8.5 billion Chips and Science Act grant that Intel is set to receive to support factories in four U.S. states. The projects include a factory in New Albany, Ohio, that Intel says could become the world's largest chip manufacturing operation.

Intel still has a long way to go to regain Wall Street's full trust. After years of losing ground to its competitors and losing its technological edge, the Silicon Valley pioneer is now valued at less than $90 billion. On this basis, it is no longer one of the top ten chip manufacturers. Nvidia, on the other hand, now has a market capitalization of around $2.9 trillion.

Intel shocked investors last month with a dismal financial report, triggering its biggest one-day loss in decades. Analysts called the announcement Intel's worst quarterly report ever.

Gelsinger acknowledged in a letter to employees that the chipmaker's performance had drawn negative criticism – and fueled speculation about what might happen to the company. The only way to “silence our critics” is to deliver results and do better work, he said. This week's announcements are a step in that direction, he said.

“Is it good enough? No. Is it substantial? Yes,” he said in an interview. “I have renewed my commitment. We will complete a groundbreaking task.”

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