U.S. Intel

Now that everyone is using ChatGPT, the lazy columnist’s trick of quoting Wikipedia to open an Article is less cliché than it is charming (at least that’s my excuse). Anyhow, here is Wikipedia’s definition of “steelmanning”:

A steel man argument (or steelmanning) is the opposite of a straw man argument. Steelmanning is the practice of applying the rhetorical principle of charity through addressing the strongest form of the other person’s argument, even if it is not the one they explicitly presented. Creating the strongest form of the opponent’s argument may involve removing flawed assumptions that could be easily refuted or developing the strongest points which counter one’s own position. Developing counters to steel man arguments may produce a stronger argument for one’s own position.

The beauty of being in the rather lonely position of supporting the U.S. government taking an equity stake in Intel is that I don’t have to steelman the case about it being a bad idea. Scott Lincicome, for example, had a good Twitter thread and Washington Post column explaining why this is a terrible idea; this is the opening of the latter:

President Donald Trump’s announcement on Friday that the U.S. government will take a 10 percent stake in long-struggling Intel marks a dangerous turn in American industrial policy. Decades of market-oriented principles have been abandoned in favor of unprecedented government ownership of private enterprise. Sold as a pragmatic and fiscally responsible way to shore up national security, the $8.9 billion equity investment marks a troubling departure from the economic policies that made America prosperous and the world’s undisputed technological leader.

Lincicome lists a number of problems with this transaction, including (but not limited to!):

• Intel making decisions for political rather than commercial considerations
• Intel’s board prioritizing government interests over their fiduciary duties
• Other companies being pressured to purchase Intel products, weakening their long-term position.
• Disadvantaging the competitive position of other companies
• Incentivizing the misallocation of private capital

Lincicome and all of the other critics of this deal are absolutely correct about all of the downsides. The problem with their argument, however, is the lack of steelmanning, in two respects: first, Lincicome’s Twitter thread doesn’t mention “China” or “Taiwan” once (the Washington Post column mentions China, but not in a national security context). Second, Lincicome et al refuse to grapple with the possibility that chips generally, and foundries specifically, really are a unique case.

The Geopolitical Case

There is a reason I’ve written so much about chips, and for many years before the AI wave brought the industry to prominence; start with 2020’s Chips and Geopolitics:

The international status of Taiwan is, as they say, complicated. So, for that matter, are U.S.-China relations. These two things can and do overlap to make entirely new, even more complicated complications.

Geography is much more straightforward:

Taiwan, you will note, is just off the coast of China. South Korea, home to Samsung, which also makes the highest end chips, although mostly for its own use, is just as close. The United States, meanwhile, is on the other side of the Pacific Ocean. There are advanced foundries in Oregon, New Mexico, and Arizona, but they are operated by Intel, and Intel makes chips for its own integrated use cases only.

The reason this matters is because chips matter for many use cases outside of PCs and servers — Intel’s focus — which is to say that TSMC matters. Nearly every piece of equipment these days, military or otherwise, has a processor inside. Some of these don’t require particularly high performance, and can be manufactured by fabs built years ago all over the U.S. and across the world; others, though, require the most advanced processes, which means they must be manufactured in Taiwan by TSMC.

This is a big problem if you are a U.S. military planner. Your job is not to figure out if there will ever be a war between the U.S. and China, but to plan for an eventuality you hope never occurs. And in that planning the fact that TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles is a major issue.

The rise of AI makes these realities — and related issues like chip controls — even more pressing. I made the argument earlier this year in AI Promise and Chip Precariousness that the U.S. should be seeking to make China more dependent on both U.S. chip companies and TSMC manufacturing, even as it was doing the opposite. The motivation was to preserve dominance in AI, but this ignored the reality I just laid out: AI depends on chips, and those chips are made next door to China; that means that stopping China could be worse than China succeeding:

It’s also worth noting that success in stopping China’s AI efforts has its own risks: another reason why China has held off from moving against Taiwan is the knowledge that every year they wait increases their relative advantages in all the real world realities I listed above; that makes it more prudent to wait. The prospect of the U.S. developing the sort of AI that matters in a military context, however, even as China is cut off, changes that calculus: now the prudent course is to move sooner rather than later, particularly if the U.S. is dependent on Taiwan for the chips that make that AI possible.

Beyond the human calamity that would result from a Chinese attack on Taiwan, there is the economic calamity downstream of not just losing AI chips, but chips of all sorts, including the basic semiconductors that power not just computers but basically everything in the world. And, to that end, it’s worth pointing out that an Intel that succeeds doesn’t fully address our chip dependency on Taiwan. It is, however, a pre-requisite, and any argument about the U.S. government’s involvement with Intel must grapple with this reality.

Decisions Over Decades

There was one line in Lincicome’s Article that definitely made me raise my eyebrows (emphasis mine):

The semiconductor industry, more than most, requires nimble responses to rapidly changing technology and market conditions. Intel already faces significant operational and competitive challenges; it has been a technological laggard for more than a decade as Nvidia, AMD, TSMC and other competitors have raced ahead. Adding a layer of political oversight to Intel’s already-complex turnaround effort is far more likely to hinder than help.

I get Lincicome’s point, which certainly applies to the technology industry broadly; just look at all of the upheaval that has happened in the two-and-a-half years since ChatGPT launched. I would argue, however, that chips are different: Intel is a technological laggard because of choices made decades ago; it just takes a really long time for the consequences of mistakes to show up.

Starting a new blog is a bit like a band publishing their debut album: you’re full of takes that you’ve held for years and have been waiting to unleash. In my case, I had been worried about Intel ever since they missed out on mobile, which meant they missed out on the associated volume that came from making chips for every smartphone in the world. Volume is critical when it comes to managing the ever-expanding cost of staying on the leading edge: as the cost of fabs has surged from hundreds of millions to tens of billions of dollars, the only way to fab chips profitably is to have enough volume over which to spread those massive capital expenditures.

And so, within a month of launching Stratechery, I wrote that Intel needed to become a foundry — i.e. make chips for other companies — if they wanted to remain viable in the long run. And, to be honest, I had been saving up that take for so long that I thought I was too late; after all, I started Stratechery in 2013, six years into the mobile era, and given the massive changes Intel would have to undergo to become a customer service organization, I thought they needed to make that change at least three years earlier.

And then, for the next eight years, Intel’s stock went up and up, as the company rode the cloud boom that was the yin to the smartphone’s yang. If anyone had read my 2013 Article and sold their Intel shares, or worse, shorted them, they would have lost their shirt!

In the end, however, my take was correct, even if it was un-investable. First Intel fell behind TSMC, who was powered by massive orders from Apple in particular, and then, on the company’s last earnings call, CEO Lip-Bu Tan admitted the reality of what could have been forecasted when Steve Jobs walked onto that 2007 MacWorld stage:

Up to and through Intel 18A, we could generate a reasonable return on our investments with only Intel Products. The increase in capital cost at Intel 14A, make it clear that we need both Intel products, and a meaningful external customer to drive acceptable returns on our deployed capital, and I will only invest when I’m confident those returns exist.

This is the rotten tree sprung from the seed of Intel’s mobile failure: the company could afford to miss out on a massive market for nearly two decades, but when it comes to 14A, the company simply can’t sell enough chips on its own to justify the investment.

What is worse is the tree that wasn’t planted: the real payoff from Intel building a foundry business in 2010, or 2013 as I recommended, is that they would have been ready for the AI boom. Every hyperscaler is still complaining that demand exceeds supply for AI chips, even as Intel can’t win customers for its newest process that is actually best-suited for AI chips. The company simply has too many other holes in its offering, including the sort of reliability and throughput that is essential to earning customer trust.

In short, contra Lincicome, Intel’s problem is not short-term decision-making, because Intel is in the business of making chips, and making chips is a decades-long endeavor of building expertise, gaining volume, moving down the learning curve, and doing it all again and again to the tune of tens of billions of dollars a year in capex.

That, by extension, is why the stakes today are so high. The problem facing the U.S. is not simply the short-term: the real problems will arise in the 2030s and beyond. Semiconductor manufacturing decision-making does not require nimbleness; it requires gravity and the knowledge that abandoning the leading edge entails never regaining it.

Competing with TSMC

This also puts to rest one of the traditional objections to government intervention in support of an incumbent: in almost every case that investment crowds out new companies, companies that are, yes, more nimble and more capable of meeting the moment. The reality of semiconductor manufacturing, however, is that the path is far too long and arduous to ever fill the vacuum that Intel’s exit would leave. Actually, though, that last line is not quite right: Intel’s biggest problem is that its market challenges are closer to that mythical startup that will never exist.

Suppose our mythical startup somehow received hundreds of billions of dollars worth of funding, and somehow moved down the decades-long learning curve that undergirds modern silicon manufacturing: to make the business work our mythical startup would actually need to find customers.

Our mythical startup, however, doesn’t exist in a vacuum: it exists in the same world as TSMC, the company who has defined the modern pure play foundry. TSMC has put in the years, and they’ve put in the money; TSMC has the unparalleled customer service approach that created the entire fabless chip industry; and, critically, TSMC, just as they did in the mobile era, is aggressively investing to meet the AI moment. If you’re an Nvidia, or an Apple in smartphones, or an AMD or a Qualcomm, why would you take the chance of fabricating your chips anywhere else? Sure, TSMC is raising prices in the face of massive demand, but the overall cost of a chip in a system is still quite small; is it worth risking your entire business to save a few dollars for worse performance with a worse customer experience that costs you time to market and potentially catastrophic product failures?

We know our mythical startup would face these challenges because they are the exact challenges Intel faces. Intel may need “a meaningful external customer to drive acceptable returns on [its] deployed capital”, but Intel’s needs do not drive the decision-making of those external customers, despite the fact that Intel, while not fully caught up to TSMC, is at least in the ballpark, something no startup could hope to achieve for decades.

Intel’s Credibility Problem

These realities are why I argued a year ago that the U.S. government needed to prop up demand for Intel manufacturing, a point I reiterated earlier this year. And, to steelman the argument of those opposed to this deal, there are ways to do that without acquiring part of the company.

The problem, however, comes back to what Tan said on that earnings call: beyond all of the challenges above, what company is going to go through the trouble of getting their chip working on Intel’s process if it’s possible that the company is going to abandon manufacturing on the next process? It’s a catch-22: Intel needs an external customer to make its foundry viable, but no external customer will go with Intel if there is a possibility that Intel Foundry will not be viable. In other words, the stakes have changed from even earlier this year: Intel doesn’t just need demand, it needs to be able to credibly guarantee would-be customers that it is in manufacturing for the long haul.

A standalone Intel cannot credibly make this promise. The path of least resistance for Intel has always been to simply give up manufacturing and become another TSMC customer; they already fab some number of their chips with the Taiwanese giant. Such a decision would — after some very difficult write-offs and wind-down operations — change the company into a much higher margin business; yes, the company’s chip designs have fallen behind as well, but at least they would be on the most competitive process, with a lot of their legacy customer base still on their side.

The problem for the U.S. is that that then means pinning all of the country’s long-term chip fabrication hopes on TSMC and Samsung not just building fabs in the United States, but also building up a credible organization in the U.S. that could withstand the loss of their headquarters and engineering knowhow in their home countries. There have been some important steps in this regard, but at the end of the day it seems reckless for the U.S. to place both its national security and its entire economy in the hands of foreign countries next door to China, allies or not.

Given all of this, acquiring 10% of Intel, terrible though it may be for all of the reasons Lincicome articulates — and I haven’t even touched on the legality of this move — is I think the least bad option. In fact, you can even make the case that a lot of what Lincicome views as a problem has silver linings:

• Intel deciding to stay in manufacturing is arguably making a political decision, not a commercial one; however, it is important for the U.S. that Intel stay in manufacturing.
• Intel prioritizing government interests — which are inherently focused on national security and the long-term viability of U.S. semiconductor manufacturing — over their fiduciary duties could just as easily be framed as valuing the long-term over the short term; had Intel done just that over the last two decades they wouldn’t be in this position.
• Other companies being pressured to purchase Intel products is exactly what Intel needs to not just be viable in manufacturing, but also to actually get better.
• If TSMC and Samsung are disadvantaged by not making chips in the U.S., that’s a good thing from the U.S. perspective. Both companies are investing here; the U.S. wants more.
• Private capital prioritizing U.S. manufacturing is a good thing!

The single most important reason for the U.S. to own part of Intel, however, is the implicit promise that Intel Foundry is not going anywhere. There simply isn’t a credible way to make that promise without having skin in the game, and that is now the case.

Steelmanning

I’ll be honest: there is a very good chance this won’t work. Intel really is a mess: they are actively hostile to customers, no one in the industry trusts them, they prioritize the wrong things even today (i.e. technical innovation with backwide power over yields for chips which don’t necessarily have interference issues), and that’s even without getting into the many problems with their business. Moreover, I led with Lincicome’s argument because I agree! Government involvement in private business almost always ends badly.

At the same time, the China concerns are real, Intel Foundry needs a guarantee of existence to even court customers, and there really is no coming back from an exit. There won’t be a startup to fill Intel’s place. The U.S. will be completely dependent on foreign companies for the most important products on earth, and while everything may seem fine for the next five, ten, or even fifteen years, the seeds of that failure will eventually sprout, just like those 2007 seeds sprouted for Intel over the last couple of years. The only difference is that the repercussions of this failure will be catastrophic not for the U.S.’s leading semiconductor company, but for the U.S. itself.