After decades of uncertainty, Tower is reaping the benefits of the chaos in the chip market
The Israeli chip company is being sold to Intel for $5.4 billion; The deal comes after years of uncertainty over Tower's viability, but today the company is able to meet Intel's need to split its production capabilities and reduce activity in the East
Who needs a small semiconductor factory in Israel that tries to compete with the cluster of giant factories in the East - and one based in Migdal Haemek of all places?
That was the mood twenty years ago, when the Israel Corporation decided to set up Tower Semiconductor's (TSEM) plant, with an investment of more than $1 billion, a sum that was truly unprecedented at the time. This decision came after National Semiconductor, which set up the first chip manufacturing plant in Migdal Haemek in the 1970s, nearly closed it in the mid-1990s. The Israel Corporation, then still led by brothers Sammy and Yuli Ofer, made the first investment and saved it from closure, but neither of the two factories really reached any great success.
For many years it seemed that the Israel Corporation was investing its own money and that of others in a megalomaniacal and unnecessary project. The state gave a $250 million government grant to the second chip plant in 2001, just before the outbreak of the Second Intifada and the economic recession hit. The banks, Leumi and Hapoalim, provided half a billion dollars in credit for the plant, only to finally reach the understanding after the 2008 crisis that the debt would not be returned and converted it into Tower shares. Even Idan Ofer, who was the living spirit behind the establishment of the second plant, gave up and in 2015 Tower shares were distributed as an in-kind dividend to the shareholders of Canon, its technology holding company. The only one who stuck to the Zionist vision was actually the American CEO Russell Ellwanger, who was brought in to manage Tower in 2005 in a move that was surprising and unconventional in those days.
In the first years, which were years full of investments on the one hand and loans on the other, he mostly grit his teeth. When it seemed as if in just another moment Tower was about to take off, the financial crisis of 2008 hit and turned everything upside down. It was only in 2010 that Tower got back on the right track, led by Ellwanger, that has now brought it to be acquired by Intel (INTC) for $5.4 billion.
Tower is one of the oldest companies in the technology sector in Israel, and far from being the most glamorous of them, and being far from what is known as the technological "ecosystem", plus its chips are not even manufactured with the latest technologies, but it is now reaping the fruits of the perfect chaos in the chip market.
There, for more than a year, Intel has been looking for ways to deal with soaring demand for processors for almost all of its areas of activity, on the one hand, and with supply chain disruptions and logistics bottlenecks on the other.
2021 could have been an amazing year for Intel, but logistical constraints and delays in moving to the production of the most advanced chips, that created a competitive gap with the competition, led to its revenue being stagnant last year. The current year’s forecast also does not talk about meteoric growth but mainly about continuing to face the fast Chinese competitors who are now ahead of the company whose name was once synonymous with the most up-to-date chips.
The acquisition of Tower is another significant move in the new strategy announced by Pat Gelsinger, Intel's relatively new CEO who took office less than a year ago, of focusing on Intel's traditional chipset.
In this context, several activities that are not defined as "core businesses" in Israel have already been closed, and at the same time, Intel has announced huge investments of $100 billion in the establishment of new plants.
Tower will provide Intel with more significant production capacity and strengthen its position in some of the markets in which it is less active today.
Although Tower does not produce chips with the most advanced technologies, it specializes in the important market of analog chips where there are fewer players and it has a leading position there. The Israeli company manufactures, among other things, chips for the very popular field of vehicles and is expected to report revenues of $1.5 billion in 2021 in the coming reports, with the company also being profitable.
Tower's location, far from the Far East, also responds to Intel's strategy of diversifying manufacturing capabilities and shifting some of the center of gravity of the chip industry from the East to the U.S. and other regions.
On the 20th anniversary of one of the great Zionist projects and led by a stubborn CEO, it turns out that Tower was in the right place and at the right time.