Intel’s Big Chip-Making Push in Germany Hits Bottleneck

The German government trumpeted Intel’s planned development as a game changer, backed by federal subsidies totaling 10 billion euros—equivalent to $10.59 billion—that would help the economy pivot toward new industry. The outlay is part of a European Union effort unveiled this summer to double the Continent’s share of global chip production to compete with established producers in Asia.

On the ground, however, this and similar projects face hurdles such as a shortage of skilled workers and an at-times Byzantine bureaucracy. High energy prices are one of the reasons Germany’s economy has stagnated since the end of last year and is expected to shrink this year.

The issues raise questions about Europe’s capacity to match the Biden administration’s manufacturing incentives offered through the Inflation Reduction Act and the $53 billion Chips Act. For Germany, which derives a bigger part of its gross domestic product from manufacturing than other countries on the Continent, expanding semiconductor production is essential to catching up technologically and increasing economic resilience.

To staff its factory in Magdeburg, Intel intends to send local trainees to a factory it operates in Ireland for the final year of their three-year apprenticeship program. Intel and local officials said there was no suitable local alternative in Magdeburg, a city of 240,000 people that lost a large part of its industrial base after German reunification in the 1990s.

The company’s need for cheaper electricity has prompted a national conversation on industrial-power subsidies that has split German Chancellor Olaf Scholz’s governing coalition. The required upgrades to schools, housing and transportation infrastructure to accommodate the new workers and their families could cost an additional €1 billion and forever change the character of this former manufacturing town.

Germany’s big carmakers had to idle production a few years ago because of a sudden shortage of semiconductors, highlighting the industry’s reliance on U.S. and Asian suppliers. Since then, politicians and industry executives have vowed to make manufacturers more resilient by reducing their dependence on foreign suppliers. Berlin is also subsidizing a factory that Taiwan Semiconductor Manufacturing Co. plans to build near Dresden.

The incentives have been controversial. Associations representing Germany’s midsize businesses complained about so much money going to U.S.-based Intel, as did rival chip maker GlobalFoundries.

Economist Reint Gropp said subsidizing factories would only move problems farther down the supply chain. The public spending, he said, doesn’t address the region’s structural economic weaknesses.

“The labor market is tight, and this is going to make it tighter," said Gropp, president of a research institute in nearby Halle.

Intel has already opened an office and begun a charm offensive in Magdeburg. Company officials have hosted booths at community festivals and held discussions with local government and civic officials. A branded jersey even set off speculation that the company might sponsor the local soccer club.

Bernd Holthaus, the Intel executive in charge of hiring for the plant, was part of the committee that selected Magdeburg. The company chose the city predominantly because it has 1,100 hectares, or roughly 2,700 acres, available, he said, and can be supplied by road and river.

An initial class of 20 apprentices is to begin a training program next August, with a hope to eventually increase that number 10-fold, according to Stefanie Klemmt, a chamber-of-commerce official who oversees vocational training in Magdeburg. The company had initially planned to start production in 2027.

Nearby, Otto von Guericke University is starting a degree program in advanced semiconductor nanotechnologies this year and plans to hire several dedicated professors, President Jens Strackeljan said.

Strackeljan added that he had drawn up plans to build a clean room—a lab where students can practice chip production—for about €30 million, but might discard those plans in favor of a bigger facility that the company suggested. Strackeljan said he wasn’t certain how he would be able to secure the additional funding required.

Alexander May, 34 years old, studied systems engineering and is one of the two students now training to be a semiconductor technician at the university. He grew up in Magdeburg and said Intel’s arrival made him optimistic about staying in the city.

Other residents aren’t excited about the new plant. Angela Stephan, a retired anesthesiologist, is concerned the factory would displace nearby farms, bring more traffic and disrupt the water supply.

“Intel is too big for us," she said.

Magdeburg feels noticeably less modern than larger German cities such as Berlin and Munich. Fewer people here speak English. The historic restaurant in the heart of downtown doesn’t accept credit-card payments for its signature dish, the Magdeburger Bötel, a serving of pork knuckle with sauerkraut, puréed peas and potatoes.

On a recent Monday, a group of about 20 people marched by the restaurant as part of a weekly general demonstration, carrying “Germany Stand Up!" signs and singing a nationalist song set to the tune of the Soviet national anthem. Roughly 2,000 people listened to speakers from the anti-immigration Alternative for Germany party, or AfD, during a Sept. 16 protest against the federal government.

The nationalist party had 29% approval in the state of Saxony-Anhalt, according to a June poll by research group Insa, making it the second most popular party—just 2 percentage points behind the conservative Christian Democrats, or CDU.

Potential hostility in the region toward foreigners could pose a problem for Intel. Holthaus estimated that 30% to 40% of the company’s new workforce would come from outside Germany.

The cost of electricity has been a concern for executives at Intel, where similar facilities use about 300 million kilowatt-hours of electricity every quarter. The average electricity cost for large-scale users in Germany was 19 cents a kilowatt-hour in the second half of 2022—more than 40% higher than in France and Poland, according to EU data.

Deputy Mayor Sandra Yvonne Stieger has been working for two years to bring the plant to Magdeburg. She said Saxony-Anhalt, the state where the city is located, has lots of renewable-energy generation. State officials have said they might help the company build a dedicated wind farm, but Stieger said there are no concrete plans for such a facility.

Other regions of eastern Germany have had some success in attracting U.S. high-tech manufacturers. In Grünheide, an area east of Berlin, Tesla opened its first European factory last year. Local officials used fast-track legislation to help the automaker, and Tesla gambled by starting construction before final environmental approvals were granted. The facility now produces 5,000 vehicles a week. Still, Tesla paused expanding battery production at the site last year because of rising electricity costs.

The government has discussed subsidizing the cost of electricity for crucial industrial users but so far hasn’t adopted the plan. Critics have dubbed it “Intel’s law," but the company hasn’t taken a position.

Stieger said upgrades to the region’s infrastructure, from sewers to power lines, would benefit everyone, not just Intel.

“If we want to have production back in Germany, we have to pay for it," she said. “Maybe it’s not cheap, but in the long-term, it’s necessary."

Write to Jimmy Vielkind at jimmy.vielkind@wsj.com