Big news, Qualcomm plans to acquire Intel!

1. The largest technology merger and acquisition in history may be born

According to the Wall Street Journal, Qualcomm has contacted Intel about a potential acquisition. This would be one of the largest and most far-reaching deals in recent years.

When it comes to Intel, everyone is familiar. With its ubiquitous chips in personal computers (PCs) and servers, Intel's influence in the semiconductor annals and the global chip industry is significant.

However, over the past year, Intel's stock price has fallen by nearly 40%, with a current market value of $93.3 billion; Qualcomm's stock price has risen by more than 50%, with a current market value of $188.2 billion. Considering Intel's market value, if Qualcomm successfully acquires Intel, this would become the largest technology merger and acquisition deal in history, surpassing Microsoft's $69 billion acquisition of Activision Blizzard.

It is still uncertain whether this acquisition will ultimately succeed. According to the important regulations of U.S. antitrust policy - the "Merger Guidelines" and the "Horizontal Merger Guidelines," Qualcomm's acquisition of Intel may face antitrust investigations, and there have been many similar failed cases in the past.

In 2017, Broadcom offered more than $100 billion to acquire Qualcomm. The following year, the U.S. Trump administration blocked the deal on national security grounds because Broadcom was headquartered in Singapore at the time. In 2021, the U.S. Federal Trade Commission sued Nvidia on antitrust grounds to prevent its acquisition of Arm, and under additional pressure from European and Asian regulators, the deal was canceled in 2022.

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However, whether this deal succeeds or not is not as important as the fact that the PC chip giant Intel has fallen to the point of being acquired by others, similar to the acquisitions of Motorola and Nokia in the past. We should pay more attention to the implications behind this, as the fall of any giant represents a reversal of trends.

2. Intel can't compete with TSMC

Why, against the backdrop of a thriving chip industry, has the chip giant Intel fallen to the point of being acquired by others?This is greatly related to its disappointing performance. In August, Intel released its second-quarter financial report and third-quarter guidance, which were far below market expectations. At the same time, it announced a large-scale layoff plan of about 15,000 people within the year. In the second quarter of 2024, Intel's revenue was $12.8 billion, a year-on-year decrease of 1%; net loss was $1.654 billion. Adding the loss of $437 million in the first quarter of 2024, Intel lost $2.091 billion in the first half of this year.

In fact, the reason behind this is very simple.

Intel is one of the few factories in the industry that has the ability to design, manufacture, and package chips at the same time. But the problem is that, whether it's manufacturing or packaging, it's not a very profitable business in essence, and the gross margin is far behind design.

Therefore, Intel's price advantage in manufacturing is not as good as TSMC, which specializes in foundry. As a result, the huge production capacity, in addition to Intel's own orders, has very few other large orders, which leads to low utilization of production capacity, and the cost naturally goes up. In addition, the price of American workers is not on the same level as other countries, and the manufacturing cost is also different.

Under this unfavorable situation, in 2021, Intel's new CEO, Gelsinger, was determined to catch up with Asian competitors TSMC and Samsung Electronics in chip production. He also invested heavily to expand Intel's manufacturing business against the trend, and the result can be imagined.

Now, it has to prepare to split the manufacturing business. According to the forecast data previously released by Intel, after splitting the wafer manufacturing business, it can save $3 billion in costs in 2023, and save $8-10 billion in costs in 2025.

So, in essence, Intel's continuous decline in performance represents the continuous decline of American manufacturing competitiveness, and the loss of American manufacturing is moving from the middle end to the high end. In simple terms, on the surface, it seems that Intel is retreating step by step, but in fact, it is the high-end manufacturing of the United States that is behind it.

3. American manufacturing is hard to support alone. "The United States invented semiconductors. More than 30 years ago, the United States accounted for 40% of the global chip output. Later, our economic pillar - manufacturing was hollowed out, and semiconductor manufacturing went overseas. Now, this law will bring semiconductor (manufacturing) back to the United States... In the next few decades, we will lead the world again." Biden described America's "chip dream" in this way when signing the $52 billion "Chip Act".

The means to achieve this dream is to support chip manufacturing giants like Intel. At the beginning of this year, Intel signed a non-binding preliminary term memorandum (PMT) with the U.S. Department of Commerce, which will provide about $8.5 billion in direct grants to Intel according to the "Chip Act", and up to $11 billion in loans.

In order to retain Intel, the U.S. Department of Defense also provided Intel with orders for the production of advanced military orders, and the various expenses related to the process can receive up to $3.5 billion (about 100 billion New Taiwan dollars) in subsidies from the Department of Defense.However, these have little use. Intel's failure is a failure of the entire American semiconductor manufacturing industry, and also a failure of the entire high-end manufacturing industry in the United States. It also signifies the failure of the "Chips Act," which is a symbolic event, and the hollowing out of American manufacturing is a foregone conclusion.

US manufacturing GDP share / US manufacturing employment share

Similar cases also occurred in Boeing manufacturing. On January 5th of this year, an Alaska Airlines Boeing 737 MAX9 passenger plane had an emergency hatch door fall off, and it made an emergency landing shortly after takeoff. The company then found that several Boeing 737 MAX9 passenger planes had loose bolts. On April 21st, a South African Safair Airlines Boeing 737-800 passenger plane had a tire on the left main landing gear fall off during takeoff. On July 10th local time, an American Airlines Boeing 737-800 passenger plane had multiple tire blowouts while taxiing on the runway. On September 19th, a Delta Airlines Boeing 737-900 passenger plane had issues with the cabin pressure system during flight, causing minor injuries to some passengers.

Additionally, approximately 33,000 workers in Seattle and Portland held a large-scale strike on September 13th after rejecting a new labor contract with Boeing, demanding higher pay raises, among other things. This is the second large-scale worker strike at Boeing in 16 years.

Moody's, S&P, and other major rating agencies have recently warned that they are considering downgrading Boeing's credit rating to "junk" level.

In fact, under the call for American manufacturing, many foreign companies have also tried to build factories in the United States. Micron, Microchip Technology, and other American companies, as well as overseas giants such as TSMC, Samsung, and SK Hynix, have all officially announced investments in the United States. Huge investments and high-profile factory ceremonies have also added luster to the "Chips Act" at one time. Another well-known example is Foxconn's factory in the United States, which turned out to be a joke.

4. Self-revolution: The hollowing out of American industry has become a foregone conclusion.

A few days ago, Zeng Yuqun, the boss of CATL, mentioned in an interview with the CEO of the Norwegian Sovereign Wealth Fund why Europe, which clearly has the ability to manufacture advanced cars, does not have the ability to manufacture batteries.

Because batteries were considered a low-end industry in the past, there were very few engineers in Europe and America who really started learning how to manufacture batteries, and only China, for various reasons, has a large number of electrochemical engineers. (Reference: "Why must CATL appear in China?")

In fact, the situation of American manufacturing is also similar to Europe and has undergone self-revolution. What have a large number of students gone to study? They have all gone to study finance, the internet, and the like, which offer high salaries and good working environments. Over time, there are no such talents. Large-scale industrial workers cannot be cultivated in 1 or 2 years.Tsai-Hao Wu, a former factory construction expert at TSMC, stated in an interview that overseas companies building factories in the United States mainly face two types of issues: one is on the construction side, where there is a lack of professional construction talent. The second is on the operational side, including the cost of raw material supply chains and labor issues. However, the most troublesome aspect is talent.

A few years ago, TSMC made a grand move to establish a foundry in the United States, but what was the outcome? Half of the engineers/workers at the Arizona factory were sent from TSMC headquarters in Taiwan, and the other half were local Americans. As a result, TSMC's factory in the United States has invested $65 billion over four years, and to this day, not a single chip has been produced.

If TSMC really insists on going to the United States to build a contract manufacturing business, it would be an extremely rare opportunity for domestic contract manufacturers. Regardless of how cutting-edge chip manufacturing is, it is essentially still a manufacturing industry, and as a manufacturing industry, it must follow the laws of manufacturing, focusing on cost and economies of scale.

What does the manufacturing industry rely on? It relies on inexpensive senior engineers and low energy costs. Therefore, the hollowing out of the American manufacturing industry has become a foregone conclusion, and the so-called return of American manufacturing is just a pipe dream of American politicians.

5. The Rise of Made in China

Now, globally, the place that has both industrial chain capabilities and cost advantages is China. This is not self-praise, but a hard fact.

In "China in Transition: The Irresistible Cost Advantage Sweeping the Globe," I introduced some data from the latest research report by Goldman Sachs:

➡️ The average cost of domestic air conditioner production is 10%-30% lower than that of overseas peers;

➡️ The average cost of domestic photovoltaic module production is 30%-60% lower than that of overseas peers;

➡️ The production cost of domestic new energy vehicles is 47% lower than that of overseas peers.➡️ The average production cost of lithium batteries in China is 28%-56% lower than that of overseas peers;

➡️ The average production cost of domestic construction machinery enterprises is 8%-46% lower than that of overseas peers.

This massive advantage of Chinese manufacturing is built on the foundation of 8 million engineering graduates per year, on the basis of being a global energy cost lowland, and on the basis of a super unified market of 1.4 billion people.

I also provide a piece of data: currently, China's industrial robot installation volume accounts for more than 50% of the global share, industrial internet has achieved full coverage of major industrial categories, and 421 national-level intelligent manufacturing demonstration factories have been cultivated.

Many people are pessimistic about China's future, especially in the past two years when China's economy has entered a cyclical low period, and recently all kinds of complaints have emerged, even many demons and ghosts have come out to make trouble. However, the truth is the truth, and the trend is the trend, which does not change according to people's will.

Regardless of public opinion, we must understand that innovation is nothing more than trial and error. There are countless people in China who are constantly trying and making mistakes. It's just a matter of time before they catch up. As for the Americans, how far can they go on the new path? We don't know yet.

However, as long as the foundation of Chinese manufacturing is not shaken, no problem is a big problem.