Trump’s Intel deal moves America to state-run capitalism

Who would have thought that a Republican government would embrace US-style state capitalism?

Last Friday, the Trump administration announced that the US government would take up a 9.9 per cent stake in troubled chipmaker Intel, converting $US8.9 billion ($13.7 billion) of grants that the company might have received under Joe Biden’s Chips and Science Act into equity.

The deal came after a meeting this month between Donald Trump and Intel chief executive Lip-Bu Tan, whose resignation Trump had previously demanded (without any obvious authority) because of his investments in some Chinese technology companies.

“He walked in wanting to keep his job, and he ended up giving us $US10 billion for the United States,” Trump said after the meeting.

The Trump administration says it won’t have board representation or any governance rights, although the US will receive a five-year warrant to buy an additional 5 per cent stake if Intel relinquishes control of its foundry, or chip-making, unit.

Trump’s Commerce Secretary Howard Lutnick said at the weekend that Trump had decided to “turn the money that Biden was going to give away” into “equity for the American people”.

He said Biden had been going to give Intel the money “for free”, but Trump had said, “hey, we want equity for the money”. Trump’s perspective, he said, was: “Why are we giving a company worth $US100 billion this kind of money?”

Under the Chips and Science Act, which set aside $US52.7 billion for grants to incentivise domestic chip-making, Intel could have received up to $US11 billion if it met a number of benchmarks. There were also provisions for sharing of windfall profits.

The $US8.9 billion was money allocated to Intel but not yet paid because it hasn’t yet met the benchmarks. The Trump deal, in contrast, has no performance hurdles.

The exchange of the grant money for equity is the largest public-private deal the US government has entered into since the bailouts of US auto companies and financial institutions during the 2008 global financial crisis, when there were fears of a financial system collapse.

‘People come in and they need something. I hope I’m going to have many more cases like [the Intel deal].’

Donald Trump

It follows a string of other unusual deals Trump has done with US private companies that have raised eyebrows and generated criticism within Republican circles.

Among them are the 15 per cent “tax” Trump imposed on Nvidia and AMD’s sales of some of their more advanced chips to China, chips they had been banned from selling to China – until they agreed to give up a share of their revenues.

Trump has also proposed that the US should be gifted a stake in TikTok’s US business, which its parent ByteDance is being forced to sell, and demanded a “golden share” in US Steel as the price of its approval for the firm’s acquisition by Nippon Steel. The administration also has taken up a 15 per cent stake in a US rare earths miner.

Trump’s trade deals with Japan and Europe and others also purport to include massive commitments to investment in the US – investments that Trump claims would be at his discretion.

Trump said on Monday that the economic strategy underpinning the Intel deal was to “get as much as I can”.

“People come in and they need something. I hope I’m going to have many more cases like it [the Intel deal].”

There are already suggestions that other tech companies, such as Taiwan’s TSMC and South Korea’s Samsung, that have been awarded grants not yet paid under the Chips and Science Act could face similar pressure to issue equity to the government if they want the funds.

These deals would be anathema to traditional Republicans committed to free market capitalism, which in the US has had a Darwinian element to it that has driven competition and innovation.

It would be galling to Republicans that the Intel deal was enthusiastically endorsed by Democratic Senator Bernie Sanders, who they regard as a socialist, if not something more extreme.

Intel, with a market capitalisation of $US107 billion, didn’t need government equity. It very recently raised $US2 billion from issuing shares to Japan’s SoftBank.

Once the dominant chip designer and manufacturer in the US, it badly lags companies such as Nvidia and AMD and has few, if any, external customers for the chips its foundry makes. The company has incurred losses in each of the past six quarters and the foundry business lost $US13 billion last year.

Its problem is in technology, not its balance sheet. It missed the smartphone and AI revolutions and the industry’s shift to the graphics processing units that have made Nvidia a $US4.4 trillion company.

The fear in the industry is that to validate and protect its shareholding, the Trump administration – or some future administration – will try to direct business and “encourage” US companies to direct some of their business to Intel.

State-directed capitalism distorts decision-making and competition.

Intel laid off 15,000 employees last year and has said it plans to cut another 20,000 this year. The US economy is slowing and the labour market shrinking. Will Intel be pressured to reduce or abandon those job cuts to help its new shareholder out?

Will Nvidia and AMD see sales they would have made diverted to Intel because of pressure on their customers from the White House, or a desire by companies to ingratiate themselves with Trump?

Intel has explored the possibility of selling all or some of its foundry. Is a deal that might be in the best interests of its non-government shareholders now off the table?

Those shareholders, incidentally, are being diluted by the issue of equity at below-market prices. Intel has given the government a $US10.6 billion shareholding in exchange for $US8.9 billion it could have gained without diluting its existing shareholders’ returns.

The administration has no coherent strategy for its shift toward state-run capitalism.

There is no coherent industry policy other than Trump’s fixation with tariffs. There doesn’t seem to have been any thought given to how the government will manage conflicts that will arise by being both a policymaker for the semiconductor sector and now a participant in it.

Trump’s deals are just opportunistic grabs – they have been described as “shakedowns” and “extortion” – for cash or value by a president who seems himself as the consummate dealmaker.

Nvidia’s rise and Intel’s fall have illustrated the dynamic and almost brutal cycles of US competition and innovation. Trump has now intervened in that cycle and is threatening to use the deal as a model for further interventions.

Who would have thought that Republicans, rather than Democrats, would be pursuing an economic strategy that echoes that of the European economies of the 1970s, or the Chinese model they have routinely condemned?

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