• Intel's CEO departure reignited debate on splitting its factories from the company.
• Intel's fabs are costly, but they're also considered vital for US national security.
• CHIPS Act funding requires Intel to maintain majority control of its foundry.

One central question has been hanging over Intel for months: Should the 56-year-old Silicon Valley legend separate its chip factories, or fabs, from the rest of the company?

Intel's departing CEO, Pat Gelsinger, has opposed that strategy. As a longtime champion of the company's chip manufacturing efforts, he was reluctant to split it.

The company has taken some steps to look into this strategy. Bloomberg reported in August that Intel had hired bankers to help consider several options, including splitting off the fabs from the rest of Intel. The company also announced in September that it would establish its Foundry business as a separate subsidiary within the company.

Gelsinger's departure from the company, announced Monday, has reopened the question, although the calculus is more complicated than simple dollars and cents.

Splitting the fabs from the rest of its business could help Intel improve its balance sheet. It likely won't be easy since Intel was awarded $7.9 billion in CHIPS and Science Act funding, and it's required to maintain majority control of its foundries.

Intel declined to comment for this story.

A breakup could make Intel more competitive

Politically, fabs are important to Intel's place in the American economy and allow the US to reduce dependence on foreign manufacturers. At the same time, they drag down the company's balance sheet. Intel's foundry, the line of business that manufactures chips, has posted losses for years.

Fabs are immensely hard work. They're expensive to build and operate, and they require a level of precision beyond most other types of manufacturing.

Intel could benefit from a split, and the company maintains meaningful market share in its computing and traditional (not AI) data center businesses. Amid the broader CEO search, Intel also elevated executive Michelle Johnston Holthaus to CEO of Intel Products and the company's co-CEO. Analysts said this could better set up a split.

Regardless, analysts said finding new leadership for the fabs will be challenging.

"The choice for any new CEO would seem to center on what to do with the fabs," Bernstein analysts wrote in a note to investors after the announcement of Gelsinger's departure.

On one hand, the fabs are "deadweight" for Intel, the Bernstein analysts wrote. On the other hand, "scrapping them would also be fraught with difficulties around the product road map, outsourcing strategy, CHIPS Act and political navigation, etc. There don't seem to be any easy answers here, so whoever winds up filling the slot looks in for a tough ride," the analysts continued.

Intel's competitors and contemporaries are avoiding the hassle of owning and operating a fab. The world's leading chip design firm, Nvidia, outsources all its manufacturing. Its runner-up, AMD, experienced similar woes when it owned fabs, eventually spinning them out in 2009.

Intel has also outsourced some chip manufacturing to rival TSMC in recent years — which sends a negative signal to the market about its own fabs.

Intel is getting CHIPS Act funding

Ownership of the fabs and CHIPS Act funding are highly intertwined. Intel must retain majority control of the foundry to continue receiving CHIPS Act funding and benefits, a November regulatory filing said.

Intel could separate its foundry business while maintaining majority control, said Dan Newman, CEO of The Futurum Group. Still, the CHIPS Act remains key to Intel's future.

"If you add it all up, it equates to roughly $40 billion in loans, tax exemptions, and grants — so quite significant," said Logan Purk, a senior research analyst at Edward Jones.

"Only a small slice of the commitment has come, though," he continued.

Intel's fabs need more customers

Intel is attempting to move beyond manufacturing its own chips to becoming a contract manufacturer. Amazon has already signed on as a customer. Though bringing in more manufacturing customers could mean more revenue, it first requires more investment.

There's a more ephemeral reason Intel might want separation between its Foundry and its chip design businesses, too. Foundries regularly deal with many competing clients.

"One of the big concerns for the fabless designers is any sort of information leakage," Newman said.

"The products department competes with many potential clients of the foundry. You want separation," he added.

It was once rumored that a third party might buy Intel. Analysts have balked at the prospect for political and financial reasons, particularly since running the fabs is a major challenge.

• Pat Gelsinger's successor has big problems to pick up.
• The departing Intel CEO has struggled with a turnaround and left the company behind on AI.
• Intel also faces an uphill battle in its bid to outdo its industry rival TSMC.

Intel's announcement that Pat Gelsinger is retiring has thrown the storied chip firm's future into deep uncertainty. Its interim leaders and its next CEO must pick up the pieces of a turnaround plan designed to fix a business in turmoil, play catch-up in a lucrative AI race, and navigate Donald Trump's second term.

The mission assigned to Gelsinger when he took over as CEO in 2021 was to restore the then-52-year-old company to relevancy. Its business of designing and manufacturing chips — once industry-leading — was struggling. It had to contend with Big Tech customers pushing forward with their own designs, and with production setbacks from manufacturing woes.

Now the challenges are even greater. It has failed to capitalize on the generative-AI boom that has enriched rivals like Nvidia and TSMC. It is also struggling to make the case that it's a national champion of US industry as chipmaking becomes increasingly critical to the nation's future prosperity.

In October, Intel announced a net loss of $16.6 billion in its third quarter, adding to a loss in its second quarter. The company announced it would suspend its dividend and reduce its head count by 15%. The market has not reacted kindly. The chip giant has lost half its value since the start of the year, sinking to a market capitalization of about $103 billion.

After Gelsinger's exit, which Bloomberg reported followed a clash with the board, it's on Intel's interim co-CEOs — David Zinsner and Michelle Johnston Holthaus — and its future leader to overcome these problems.

Closing the AI gap

In 2006, Intel's CEO at the time, Paul Otellini, famously turned down an offer from Steve Jobs to make chips for the iPhone. Intel's move to shun the smartphone market has been replayed in the AI boom.

"It hung on to PCs for too long and ignored what Nvidia was doing," said Peter Cohan, an associate professor of management practice at Babson College. "By the time Intel began to work on AI chips, it was too late, and the company had basically no market share."

Though Intel has tried to play catch-up, it has struggled to deliver. Analysts and researchers pointed to a few reasons.

Hamish Low, a research analyst at Enders Analysis, said Intel had issues during Gelsinger's tenure getting operations ready for the AI boom while dealing with the internal challenges of separating its foundry division from its design business.

"This long, drawn-out corporate process of trying to get your own house in order, when that's your focus, clearly generative AI just skipped right by," Low told Business Insider.

He added that Intel was long known as "the x86 CPU company," referring to its architecture for more general computer chips. The AI world runs on chips known as GPUs loaded into servers, so trying to shift focus while restructuring the business proved tough.

"When it suddenly is GPUs and accelerated computers, it was always going to be a tough challenge to pivot into doing those kinds of server GPU chips," he said.

Intel has felt the pains of this pivot. Its line of AI chips, known as Gaudi, has paled in comparison with offerings from competitors like Nvidia. In an October earnings call, Gelsinger said the company would "not achieve our target of $500 million in revenue for Gaudi in 2024."

"They're in this awkward position where their server-side chips are just too subscale to ever really gain meaningful market share," Low said. "It's hard to see who the real customers for those would be."

Daniel Newman, the CEO of the research firm The Futurum Group, argued that Intel struggled because it didn't "count on the democratization of silicon." Companies like Microsoft and Google have been designing their own chips, further limiting Intel's market.

"They all went down the path of making their own investments and bets on silicon, so what was left was this second-tier enterprise market," Newman told BI. "If you look at the enterprise market, they're not buying a lot of AI silicon yet."

Making the case as a national champion

The other big challenge facing Intel's next leaders is proving that the company can be a national champion of US chipmaking. That won't be straightforward.

Doing so would require strengthening its fab-manufacturing business. "Standing up a successful fab is not an overnight thing," Newman said. "This is a multiyear process."

A lot of the challenge, he said, is that success would require "quite a bit of customer acquisition" from those who have seemed reluctant to shift high-volume production to Intel. As it stands, Intel is its own biggest customer for chip manufacturing.

That's because everyone else largely turns to the Taiwanese giant TSMC, which has grown by more than 83% this year, hitting a market capitalization of $1 trillion. Newman acknowledged that it's unclear whether this is because TSMC is technologically superior. He sees a new Intel process called 18A as being competitive, following news in September that Amazon Web Services was adopting it for a particular chip.

What's more likely, he said, is that TSMC's customers think, "TSMC's not broken, why fix it?" If Intel wants to get serious about building a leading manufacturing business, it'll need to find a way to take on TSMC.

Trump, who in his first term committed to "strengthening American leadership" in AI, might offer a hand in his second term.

The president-elect has emphasized a protectionist policy. Given the importance of chipmaking to US industry and national security, he could look to throw weight behind Intel.

How that might happen is unclear. Trump has criticized the CHIPS Act, which is set to give Intel $7.9 billion in grants to boost its domestic manufacturing capabilities. Trump has said he'd prefer tariffs as a tool to incentivize chip manufacturing on US soil.

In September, Intel announced plans to spin off its manufacturing unit into its own subsidiary. But not everyone is convinced these moves will be enough.

Cohan told BI he thinks "it is highly unlikely that Intel can be more successful than TSMC in making chips" without significant support from the US government.

"That company lacks the capital to do that on its own, and its knowledge of how to make Nvidia chips is way behind TSMC's," he said. "Why would Nvidia even choose to give up its relationship with TSMC for a less successful rival?"