A service of

Tower Semiconductor suitor Intel shoots down talk of legacy Chengdu chip investment deal with China

US chip-maker Intel [NASDAQ:INTC] has strongly rebutted speculation that it is seeking US government approval to invest and expand semiconductor chip production in China.

The company’s response comes after a detailed and specific rumor gained traction amongst hedge funds in recent weeks suggesting the tech giant last month offered to invest around USD 1.5bn in a shuttered Chengdu, China based fabrication plant to boost production of legacy 28 nanometer chips specifically for the Chinese market.

According to two people aware of the rumor, Intel has, since mid-December, been seeking approval from the Department of Commerce for the plan.

But, in an emailed reply to an enquiry from this news service, an Intel spokesperson said, “That is incorrect; Intel has sought no such approval and is not pursuing such a project.”

Had it been true, US government approval via a 90 day “reverse CFIUS” style approval process would be required because the recently enacted CHIPS and Science Act prohibits the recipients of CHIPS funding – as Intel is very much expected to be – from expanding semiconductor manufacturing in China for ten years. However, there is a specific carve out in the Act for investment in the manufacturing of legacy semiconductors, which are defined as chip technology that is of the 28 nanometer (nm) generation or older.

Six months ago, the Biden administration reportedly quashed Intel's plans to speed up advanced chip production in China via an investment in a silicon wafer factory in Chengdu. 

Prior to Intel’s denial, the people familiar with the rumor had linked the supposed investment to Intel’s ongoing attempt to seek approval from the State Administration for Market Regulation (SAMR) for its USD 5.9bn acquisition of Israel-based Tower Semiconductor [NASDAQ: TSEM]. 

Announced on 15 February 2022, the USD 53-per-share cash deal was expected to close approximately 12 months later. However, despite gaining Tower shareholder and all other required domestic and overseas regulatory approvals in July, SAMR’s review has been dragging on, as this news service reported earlier this month and in December.

Shares in Tower are trading with a 21.78% spread to the offer price signaling substantial market uncertainty that the deal will be completed.

The people familiar with the debunked Chengdu chip investment rumor said that it appeared to be Intel’s attempt at striking a side deal with the Chinese authorities to gain approval for the Tower transaction. As reported, it has become increasingly common for merging parties to strike such deals with SAMR and influential Chinese third party government agencies when their proposed deals trouble China from an industrial policy rather than pure competition perspective. 

Whilst Intel is not seeking approval from the US Government for an investment to expand Chinese semiconductor production of legacy chips, it has sought US approval in relation to the SAMR review, according to a source close to the situation.  

A China-based source not directly involved but familiar with SAMR’s general remedy negotiation procedures said the regulator has not historically required merging parties to get the US government's approval and sign off for matters relating to export control. But considering this deal is in the semiconductor sector and together with the US' expanding chip restrictions on China, it's highly likely SAMR would be seeking assurances that any commitments offered are going to last and are not going to be reneged on. The source said he believed such commitments would not be written into a conditional approval decision and will be handled as side deals. 

SAMR’s review in mid-December became one of the first batch of deals to use the agency’s relatively new stop-the-clock mechanism. There has been speculation that the clock was stopped to allow time for Intel to gain clearance from the US.

As reported, the clock was suspended following a request last month from the deal parties who needed more time to respond to a list of questions from SAMR in mid-December just as the review’s statutory 180-day timeline was due to end. The precise nature of those questions is not known. 

Another source familiar with the situation this week told this news service that the deal parties have now responded to SAMR regarding the agency’s questions. The source did not clarify whether the clock has resumed or whether the review is set to be pulled and refiled to give SAMR more time as is common in such situations.

Meanwhile, a Chinese third-party source familiar with background of the deal told this news service that Intel’s commitment regarding a capex in its Chengdu operation, whether true or not, would not be appealing to Chinese relevant industries as Tower is quite important and many Chinese chip-related enterprises are cooperating with Tower in the area of tapeout.

According to the same source, some additional investment in fabs in Chengdu, the capital city of China's southwest Sichuan province, would not offset the negative impact of the deal on China's semiconductor industry. 

The source added that the new Director General of SAMR, Luo Wen, as an expert in semiconductor industry, will very well understand the significance of the deal, and will not grant approval lightly.