Germany is pressuring Intel to expand its plans for a €17 billion chip plant in exchange for increased subsidies, in what is already the country’s largest foreign direct investment since World War II.
The US semiconductor company is expected to receive €6.8 billion in subsidies from Berlin for the construction of its megafab, or manufacturing plant, in the eastern city of Magdeburg.
According to sources close to the company, Intel wanted subsidies to be increased to at least €10 billion due to rising energy and construction costs. German officials said they could increase financial assistance, but only if the group invested more.
“It is logical that if the scale of the investment is increased, then the level of subsidy will also rise,” said Sven Schulze, economy minister of the eastern state of Saxony-Anhalt, of which Magdeburg is the capital.
“We need Intel to meet us halfway,” said one German official.
However, any requirement for Intel to invest more could put the company under financial strain at a critical juncture. It recently stated that it would reduce capital spending this year due to an unexpected drop in sales, which forced it to cut its dividend to save money.
The talks between Intel and the German government take place at a time when the Biden administration is lavishing chipmakers with hundreds of billions of dollars in subsidies in order to increase manufacturing in the United States. This has increased pressure on the EU to match such efforts or risk losing investment to America.
According to German officials, Intel’s project is being subsidized under the auspices of the European Chips Act, which aims to mobilize more than €43 billion in public and private investments for the bloc’s chip industry but is still being negotiated. Brussels will still need to confirm that the financial assistance on offer complies with EU state aid rules.
In March of last year, Intel announced that it would construct its Magdeburg megafab using the most advanced chip manufacturing technology. It is expected to be operational by 2028.
The plant is part of the company’s efforts to reclaim its place at the forefront of the chip industry after falling far behind Asian competitors like Taiwan Semiconductor Manufacturing Company. It was intended to be the centerpiece of a decade-long investment plan worth up to €80 billion, depending on demand and the availability of future subsidies.
The venture is critical to the EU’s goal of increasing its share of the global semiconductor market from less than 10% today to 20% by 2030. It is also central to German Chancellor Olaf Scholz’ strategy to reduce Germany’s reliance on Asian suppliers for advanced chips used in everything from smartphones to electric vehicles.
Since Intel announced its plans to build the megafabrication, energy prices in Germany have risen as a result of Russia’s decision to cut gas exports to Europe in the aftermath of its invasion of Ukraine. High inflation has also affected construction costs, prompting Intel to request additional subsidies.
The German government and Intel both declined to comment on Berlin’s demands for increased investment.
Intel stated that it shared Germany’s goal of “creating a more globally resilient supply chain by strengthening Europe’s semiconductor manufacturing capabilities.”
Intel also stated that “disruptions in the global economy have resulted in increased costs, from construction materials to energy” since announcing plans for the Magdeburg fab. The company stated that it was still committed to the project and had signed a purchase agreement for the site last November.
The German economy ministry said talks were underway within the government to “close the planned project’s cost gap, which has grown significantly in recent months.”