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Intel's Mobile-Chip Play in Israel

Intel's (INTC) plans for making chips that run cell phones just got a big shot in the arm: Israel's Knesset Finance Committee on Nov. 28 gave the final green light for a $3.5 billion Intel investment in a new semiconductor plant in southern Israel.

Only days earlier, the committee had put off a vote on the project, fueling concern that the decision would be delayed until after Israel's general elections in late March. The new plant in Kiryat Gat is the largest foreign investment ever undertaken in Israel. Israeli taxpayers will be subsidizing the project over the next decade to the tune of $525 million.

A TOUGH MARKET. But government officials believe the cost is well worth it. "The new plant will create thousands of new jobs and lead to sales of over $3 billion annually once the plant is fully operational," said Raanan Dinur, director general of Israel's Industry and Trade Ministry. Israel beat out India and Ireland for the plant, which will produce the next generation of Intel chips.

Dinur said the plant was crucial in maintaining Israel's position as a global leader in high tech. Intel's move to locate a research facility in Córdoba, Argentina, was considered a coup for the province (see BW Online, 10/7/05, "Córdoba: Silicon Valley South").

The plant in Israel is also a key element of Intel's concerted effort to grab a chunk of the cell-phone chip market from Texas Instruments (TXN). So far, it's been a tough market for Intel to crack. While Intel is No. 1 in the production of flash memory used in cell phones, and it has attained dominant market share in chips for PDAs, the company hasn't made much headway in the processors used to run mass-market mobile phones. Intel is "still struggling as a major player," says Allen Nogee, an analyst at research consultancy In-Stat.

NEXT-GENERATION TELECOM. Coupled with Intel's big play for so-called NAND flash memory, the plant in Israel demonstrates that the outfit is intent on turning the tide. Intel on Nov. 21 announced a joint effort with memory maker Micron (MU) to produce NAND, a type of memory used in consumer electronics and, increasingly, cell phones (see BW Online, 11/22/05, "Intel Switches Its Chip Bets"). The company might try to gain more share by selling NAND together with its phone processors in a single package, for a smaller total price than, say, Texas Instruments and other incumbents, says Len Jelinek, an analyst with chip consultancy iSuppli.

Intel declined to comment on its chip plans in Israel, other than to say, "We are gratified with the approval, and we will announce our plans shortly." If Intel execs do announce it will build a fab in Israel, "they are indicating [telecommunications] is going to be core to their business strategy," says Jelinek. "If you are going to build a fab [costing $2 billion to $3 billion], you're pretty committed."

The unanimous approval by the Knesset committee followed a report by the Industry and Trade Ministry's Investment Promotion Center that indicated that the new plant would contribute $450 million annually in direct benefits to the Israeli economy. The plant, expected to be fully operational in four years, will produce 300-millimeter-diameter silicon chips based on 45-nanometer resolution technology now under development by Intel. The chips are for use in the next generation of digital telecommunications products.

EMPLOYING ISRAEL. Initially, Intel had asked for 20% in grants and subsidies as a condition to build the plant. The Israeli government originally offered a 12.5% package, but a compromise raising the level to 15% was worked out following months of negotiations, which included the direct involvement of Israeli Prime Minister Ariel Sharon. In Argentina, Córdoba had lured Intel with a promise of a 7.5% cash subsidy toward salary costs for eight years and a pledge to put up $1.5 million needed to build the lab.

Intel is already one of the largest employers in Israel's high-tech industry: The semiconductor giant employs more than 5,000 people, and that number is expected to nearly double within four years. The new plant will be Intel's second major facility in Kiryat Gat; the first plant, which opened there in 1999, is slated for expansion. The company also has a plant in Jerusalem, as well as research and development facilities in Yakum, Jerusalem, Petah Tikva, and Haifa.


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