China-US tech fight figures in scrapped Intel deal to buy Tower Semi

Intel has dropped plans to buy Tower Semiconductor of Israel for $5.4 billion after China held up approval of the deal first announced in February 2022.

The decision is considered an indicator of the trade tensions between the US and China.    Intel had earlier said the deal might fall through if China’s approval wasn’t received by Tuesday.

Both parties agreed to the termination, according to a statement from Intel. Intel will pay Tower a termination fee of $353 million.

The reversal is broadly considered a setback to Intel’s plans to build its own ambitious contract chip manufacturing business, but CEO Pat Gelsinger put a brave face on it.

“We continue to drive forward on all facets of our strategy,” Gelsinger said in a statement. “We are executing well on our roadmap to regain transistor performance and power performance leadership by 2025.”  He said Intel will continue to seek opportunities to work with Tower.

Stuart Pann, general manager of Intel Foundry Services said IFS has gained traction since it was launched in 2021 on a goal to become the second-largest global external foundry by 2030.  IFS saw a 300% revenue increase in 2Q 2023 year-over-year.

Intel has recently signed a deal with Synopsys to develop IP on Intel 3 and Intel 18A process nodes. Also, Intel landed a deal with Arm to enable chip designers to build low-power compute SoCs on 18A.

When announced in 2022, Intel said buying Tower would give Intel access to specialty analog processors used in power applications, including for automotive. Tower shares a manufacturing facility in Italy with ST Microelectronics that Intel hoped to benefit from, Gelsinger said at the time.

Intel joined a RAMP-C program in 2021 that gives US Department of Defense access to leading edge technology, which Gelsinger had said in 2022 would enhance a Tower acquisition giving Intel a “great opportunity to step into that space with commercial and defense and intelligence as well.”

In the Wednesday announcement of the Tower deal termination, Intel noted it has now been awarded the first phase of the DoD RAMP-C program and has five RAMP-C customers in the design phase on Intel 18A.

RELATED: Intel to acquire Tower Semi of Israel for $5.4B in specialty chip bid

In 2020, Tower had 5,500 employes and $1.2 billion in revenues, much smaller than Intel.

China-US impact

Fallout between China and the US in tech reached back for years, including when Qualcomm in 2018 backed off a $44 billion purchase of NXP Semiconductors when that deal failed to gain Chinese approval by a deal deadline.

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More recently, President Biden issued an executive order on Aug. 10 to stop new US investments in China in chips, quantum and AI.

In May, China banned some of that country’s companies from buying memory chips from Micron where sales had reached $3 billion in 2022.

The US had in October announced controls on sales of advanced chips to China.

Paul Triolo, a technology consultant for Albright Stonebridge Group, told the Wall Street Journal

that the Tower deal was “heavily constrained by a series of US measures targeting China’s semiconductor industry…The failure of this high-profile deal shows how difficult the geopolitics around tech deals have become.”

Leonard Lee, analyst at neXt Curve, said the deal’s termination shows assumptions by US policymakers and some US chip companies with the creation of the CHIPS Act did not align with new realities. “We are no longer talking about chip shortages shutting down auto plants in the US,” he said via email.

Also, the termination indicates Intel is more focused with IFS on leading edge chips “to avoid building capacity into what could be a glut and is willing to take the $353 million termination fee hit.” Currently shortages are on the higher end with growing demand for HPC and generative AI, he added.

Dylan Patel, chief analyst at SemiAnalysis told Fierce that the termination is a setback "but it doesn't prevent Intel from moving forward."  The only reason for the termination was because China would not give approval, he added.

"Not being able to acquire Tower sets back Intel's foundry ambitions especially in the trailing edge chips," he added. "Now Intel does not have 300-plus foundry customers from day one of their foundry ambitions and they also cannot provide a full service from analog to trailing edge logic to leading edge logic."

Jack Gold, an analyst at J. Gold Associates, said Tower would have added analog chip capacity to Intel fabs.  "I think this is more of an inconvenience for Intel rather than a major blow to their IDF strategy, but it is still costing them a lot of money to cancel the deal and walk away," he said in an email.

Gold said i Chinese authorities probably were swayed "by the battle with the US over chips and fab equipment....We know China has been retaliating, as with Micron."