Intel is making a big bet on old semiconductor technology. The company will spend $5.4 billion to buy Tower Semiconductor, an Israeli chip manufacturer that specializes in analog semiconductors used in cars, phones, and medical devices. Unlike most American semiconductor companies, which outsourced manufacturing decades ago, Intel is doubling down on its strategy to build and buy chip factories in the US.
The biggest US semiconductor companies once manufactured plenty of chips; in the 1990s, American factories churned out 37% of the world’s semiconductors. But since then, US chip giants ceded much of the market to Taiwan. The US now makes just 12% of all semiconductors. Many American semiconductor companies—like Qualcomm, Broadcom, Nvidia, and AMD—went “fabless,” which is to say, they shut down their fabrication plants, focused all their efforts on designing the most cutting-edge chips they could, and outsourced the manufacturing to someone else (usually Taiwanese chip giant TSMC).
But pandemic-related supply disruptions, and the global semiconductor shortage they helped create, laid bare just how much of the economy depends on semiconductors—even the low-margin analog chips that companies like Tower Semiconductor make. The chip shortage shut down auto assembly lines, disrupted 169 industries, and erased 1% of US GDP in 2021. Now US companies work to make their supply chains less reliant on far flung chip foundries and US lawmakers scramble to create incentives for semiconductor companies to bring manufacturing back to the US. Intel sees a chance to cash in on some of the lowest-tech chips around.
Tower specializes in analog semiconductors, which are an older form of chip technology that date back to the dawn of computing in the 1950s and 60s. By now, they’ve mostly been replaced by digital chips, which are smaller, faster, and less prone to error. The tiniest, most advanced 5 nanometer digital chips can sell for upwards of $230 each. Analog chips generally cost less than $1.
But even so, analog chips still play an important role in any device that relies on physical sensors, including cars, smartphones, and so on. An analog chip can attach to a thermometer, for example, and send an electrical signal that varies in frequency and amplitude depending on the temperature. Those electric signals can then be read by digital chips, which are only capable of processing binary bits of information in the form of electrical 1s and 0s. Analog chips are also useful for controlling how much power a device draws from its batteries.
Semiconductors have become a hot sector for investment in recent years, but most investors’ attention is focused squarely on the most advanced digital chips—not old school analog semiconductors. Even so, Intel executives tried to project excitement about the Tower Semiconductor deal on a Feb. 15 call with investors. Intel CEO Pat Gelsinger argued that the two companies are “highly complementary,” since Intel specializes in designing advanced chips and Tower specializes in churning out older chips for niche uses. For instance, Intel might sell a carmaker high-tech digital chips that help the car drive itself, while Tower might manufacture the analog chips that help moderate how much electricity the car draws from its electric battery.
The financial analysts on the call questioned the wisdom of spending $5 billion to break into the low-margin analog chip manufacturing business. CJ Muse, an analyst at Evercore Group, pointed out that Tower Semiconductor’s profit margins lag well behind peers like TSMC. “I’m really trying to understand how this helps you and your [manufacturing] strategy, to be honest,” Muse said, according to a Factset transcript of the call.
Gelsinger argued that Tower Semiconductor, which operates eight chip factories, including two in the US, hasn’t reached the right scale to make a bigger profit on its operations, but would grow with Intel’s investment.