Intel Plans $36 Billion in European Chip Plant Investments

It is the second multibillion-dollar plant investment Intel has announced in 2022. Earlier this year, it selected Ohio to erect a $20 billion chip-making facility that could expand to a $100 billion site. Intel last year said it would expand in Arizona and New Mexico, as well, as Mr. Gelsinger tries to gain a step on aggressive competitors.

Beyond that, Mr. Gelsinger said the company in the longer term would invest a total of up to €80 billion ($87.5 billion) in Europe, including research-and-development facilities in France, as well as manufacturing facilities in Ireland, Italy, Poland and Spain.

Construction of two new factories on the German site will start in the first half of next year, with production slated to start in 2027 pending European Commission approval, Intel said. They will make some of the company’s most advanced chips, the company said, and would serve both Intel’s internal needs and make chips for outside customers.

Intel is among a raft of chip companies responding to unprecedented demand for digital products and a global chip shortage that has amplified the need for more manufacturing. Semiconductor industry sales globally surpassed $500 billion for the first time last year, and executives believe that total could double in less than a decade.

Intel is also expanding its existing manufacturing in Ireland with about $13 billion (€12 billion) in fresh investment, doubling its manufacturing space and focusing there on one of its more advanced chip-making technologies. In Italy, Intel plans to spend up to about $4.9 billion (€4.5 billion) in back-end manufacturing, where chips are packaged up and finished. In France, the company plans a research-and-development facility, and in Poland it is increasing its laboratory space.

Governments have helped give Mr. Gelsinger and others confidence to invest. Many policy makers, wary of fragility in the supply chain exposed by the Covid-19 pandemic and a global chip shortage, now view the industry as strategic and are pushing incentives to spur on domestic manufacturing.

Mr. Gelsinger suggested that the German project was contingent on government support coming through, saying in a webcast Tuesday that there was still work to be done to secure permits and “financial support needed to make the project competitive.”

In February, the European Commission proposed €43 billion of support for the industry, aiming to double Europe’s global share of manufacturing to 20% by 2030. Thierry Breton, European commissioner for the internal market who has spearheaded incentive proposals, said advanced chips had become an economic and geopolitical priority, and government support could help avoid future shocks.

For Intel, the factory complex would be its second in Europe, and one of only a handful of major manufacturing sites outside of the U.S. Intel’s other factory in Europe is in Ireland, west of Dublin, where it has produced chips since the 1990s. That facility got started and grew with the aid of substantial development incentives from the Irish government. The company also makes chips in Israel.

Mr. Gelsinger said last year that Intel intended to invest heavily in its new European factory. The company spent months scouting locations before recently settling on Germany, already home to several big chip-making sites, including ones owned by U.S. contract chip maker

GlobalFoundries Inc.

and German chip maker

Infineon Technologies AG

.

The hefty investment plan will dent profitability in the near term, Intel has said, unnerving some investors.

Intel said it expects to largely fund its investments through its cash flow and about $29.5 billion in cash and investments on hand at the end of the year, according to regulatory filings. It closed the period with about $38 billion in debt. The precise amount of cash needed will depend on the scale of government subsidies, the company said.

Intel’s big bet on manufacturing aims to recapture a technological edge from Asian rivals that have surpassed it in recent years. Intel stumbled in its effort to downsize transistors at a steady pace and pack more of them onto its chips, driving better performance, which allowed

Taiwan Semiconductor Manufacturing Co.

and South Korea’s

Samsung Electronics Co.

to take the lead.

Mr. Gelsinger also is aiming to build up a contract chip-making business, where it churns out semiconductors for others—a market dominated by TSMC. Intel has attempted to build a contract chip-making business in the past with limited success.

As Intel plans new factories, its rivals are pushing expansion plans of their own—and have big pocketbooks to fund them. Samsung said last year that it was planning $205 billion in investments over the next three years, including a $17 billion chip factory in Texas.

TSMC, the world’s largest contract chip maker, is plowing $100 billion into new chip capacity over the same period, including a $12 billion factory in Arizona that is currently under construction.

Chip makers hope to get a helping hand in the U.S. from government incentives making their way through Congress that outline $52 billion of funding for the industry, close to the amount Europe is considering. President

Biden

backs the measures and urged their passage in his State of the Union address two weeks ago, where Mr. Gelsinger was in attendance.

Chip making is one of the most complex manufacturing processes in the world, and advanced chip factories require expensive machines, some of which cost hundreds of millions of dollars. But a surge in demand during the pandemic, spurred by online services and remote work that required more computing power, led to a chip shortage and made adding manufacturing capacity more financially attractive.

Write to Asa Fitch at asa.fitch@wsj.com