US Government Stake in Intel Fuels Volatility in Semiconductor Markets

Intel’s partial nationalization raises alarm bells for investors, and many practitioners in the semiconductor space. Just like management, market participants recognize that partial government ownership of a portion of the company doesn’t mean the authorities control the company, at least not directly through the corporate boards.

Nonetheless, the government authority changes the priorities of the leadership. More and more the issues affecting decision-making and the direction of development will be driven by the political situation and not necessarily by commercial decisions or technological development.

 The primary risk for potential partners and competitors of Intel is that they will be working not with Intel, but essentially with the US government. For customers, there is the question and risk that the government might start artificially stimulating demand for its products, which could undermine the market mechanisms that govern the industry.

 At the same time, neither Intel nor the US wants to be in the position of staying mediocre in product performance, while trying to artificially stimulate demand. This could undermine the dominant technology position of the US.

The markets are already adjusting to such news. Intel shares had increased volatility, and the Nasdaq 100 index experienced pressure in the midst of increased uncertainty in the semiconductor sector. Considering the fact that Intel is a key component in the index, any change in its capitalization will affect the index's dynamics as well as liquidity in the Nasdaq index futures. 

The production situation is especially acute for Intel due to the high level of defects in producing chips using 18A technology. This is not a critical management issue for industry leaders like TSMC, because of the size of the company. For Intel that has recorded six quarters of losses, this circumstance is a serious situation that needs management.

 A clear pattern is emerging with a downward spiral where a high defect rate leads to less interest from third party customers, and too few orders in turn lessen the company's path to stabilization. Concerns are only increasing on its ability to compete at parity with global suppliers.

The precedent with Intel is worrisome for the entire industry. Companies that trade in subsidies or government funding may be worried about similar interference in their business. Investors—especially foreign ones—are now going to be more cautious about investing in American companies. The potential for a negative influence on private investment still exists, which is a matter of long-term risk for the US semiconductor industry.

 The unresolved export issues are a distinct factor. The government may control Intel, which can lead to suspicion and potential buyers worrying about backdoors and spying tools in the chips that are delivered to them. Those concerns may therefore limit sales markets and may operate negatively on the company's financial results. The government could also exert pressure on the company, which heightens distrust in products with ties to that country.

 To summarize, the partial nationalization of Intel, and the difficulties with the production of 18A technology still appears more like a source of new problems rather than a solution to old ones. In the short-term these go a long way to increasing the volatility of technology indices, and uncertainty with investors. In the long-term, the result will depend on how the government can more or less effectively balance its interests of producing better performance to have a better product and maintain the competitiveness of the American semiconductor industry.