US Intel's factory delay adds to Germany's economic woes

The bad news on Germany's economic outlook continues to pile up.

On Monday, US chipmaker Intel announced it would stall plans for two chip factories worth €30 billion ($33 billion) in the eastern German town of Magdeburg for at least two years. 

But what is mostly seen as a cost-cutting measure at the chipmaker also highlights how the economic policy of Germany's three-party coalition government fails to kick-start investments.

Intel was planning to build a chip factory, creating some 3,000 jobs. The German government promised state aid worth €9.9 billion for the settlement, which it saw as a strategic asset to reduce dependence on semiconductors from Asian manufacturers, especially for Germany's all-important automotive industry.

Jens Südekum says sourcing chips for digitizing cars is a big problem for the industry here. 

"Intel wanted to get into the business of tailor-made customer chips which would have allowed the German car industry to secure exactly what they need for progress in digitization," the economist at Heinrich Heine University in Dusseldorf, Germany, told DW.

News of the delayed investment comes two weeks after German carmaker Volkswagen announced plans to close one, possibly two of its domestic factories due to lagging demand, especially for its electric vehicles (EVs).

Carsten Brzeski, chief economist at Dutch bank ING, thinks the two incidents point to a wider problem with investing in Germany. "What we're seeing currently is four years of de facto economic stagnation, and what ten years of deteriorating international competitiveness are doing to a country," he told DW.

Why Intel is postponing its plans in Germany

However, Brzeski also said that Intel has massive problems of its own that prompted it to stall its German plans.

And indeed, Intel chief executive Pat Gelsinger said that alongside the German factory, another one to be built in Poland will be paused, too. "We must continue acting with urgency to create a more competitive cost structure and deliver the $10 billion in savings target we announced last month," he said in a press release and letter to employees.

The Santa Clara, California-based chipmaker has been losing ground to rivals and seeing its technological edge slip. It no longer ranks as one of the top 10 semiconductor companies and is valued at less than $90 billion (€80.97 billion) — AI pioneer Nvidia, for example, now has a market capitalization of about $2.9 trillion.

Alexander Schiersch from the Institute for Economic Research (DIW) in Berlin says Intel has made ambitious plans that "didn't work out."

In an interview with DW he identified several key factors on which Intel's future would now depend: First, the company must attract more customers for its chips. Secondly, it must improve the effectiveness of its artificial-intelligence (AI) strategy, and finally, it must ensure that its cost-cutting efforts are successful.

After reporting a loss of $1 billion in the previous quarter amid shrinking sales, the company announced plans last month to slash 15,000 workers, find $10 billion in cost savings and suspend Intel’s dividend. 

Gelsinger's fortunes at Intel very much depend on plans to transform the company into a so-called foundry — a chipmaker that manufactures products for outside customers. Intel has been slow to find customers for the project, which is why his announcement on Monday of a partnership with Amazon Web Services centered around Intel-made AI chips represents a notable win.

Given Intel's current struggles, however, Schiersch estimates the likelihood of the US chipmaker one day following through on its plans for Magdeburg at "no more than 50%."

What will Germany do with €10 billion-worth in subsidies?

The postponement of the German factory is a blow to the European Union's chipmaking ambitions and is likely to reignite controversy with the German government over where to allocate the €10 billion it earmarked for subsidies.

Immediately after Intel's decision became public, Finance Minister Christian Lindner suggested using the money not spent to plug a gaping hole in the German budget. The Greens, which are also part of the three-party alliance, dismissed the intention and want to use the money for climate finance. Social Democrat Chancellor Olaf Scholz, meanwhile, has remained uncommitted so far.

People in the finance ministry with knowledge of the matter told DW that the ministry is currently exploring ways how to transfer the unused funding back into state coffers.

For ING chief economist Carsten Brzeski, government bickering over the Intel subsidy leaves questions about the governing parties' economic ambitions. "It feels like the German government does not really have a well-thought-through longer-term economic strategy," he said.

Edited by: Uwe Hessler