Investing.com -- Intel (NASDAQ:INTC) shares surged roughly 25% this week and are set for the biggest weekly gain in more than 40 years after recent media reports suggested that the US government might tap Taiwan Semiconductor Manufacturing (TSMC) (NYSE:TSM) to help support Intel's operations within the US.

Moreover, US Vice President JD Vance's comments at France's AI Action (WA:ACT) Summit, where he stressed the importance of “ensuring the most powerful AI systems are built in the US with American-designed and manufactured chips," also contributed to the rally. 

Per the reports, the team-up between Intel and TSMC could potentially fulfill the government's "Made in America" goal and simultaneously expand the Taiwanese giant's presence in Arizona.

The proposals on the table include TSMC building an advanced packaging facility in the US, a joint venture (JV) to invest in Intel's foundry operations, and the possibility for Intel to take on TSMC's packaging contracts for US clients.

Analysts at Wolfe Research have long advocated for such a partnership, viewing it as a sound strategic move for Intel.

They argue that Intel's main businesses in servers and PCs may not suffice to cover the substantial costs of advanced manufacturing facilities. Furthermore, the potential decline in the PC market due to competition from Arm-based processors could have severe implications for Intel's margins and cash flow.

“Our view is that a manufacturing partnership, in which TSMC wafers would run through INTC fabs, would represent a way out of this issue,” Wolfe analysts led by Chris Caso said in a note.

“That's based on our view that only TSMC can drive the foundry volume needed to absorb INTC's fixed costs in an expeditious manner,” they added.

Still, the implementation of such a plan is not without its difficulties, analysts said. Wolfe’s conversations with TSMC in early December revealed the company's reluctance to partner with or acquire third-party fabs, mainly due to the significant differences in process flows between TSMC and Intel.

The adaptation of Intel's facilities to fit TSMC's diverse foundry processes presents considerable technical hurdles.

Nevertheless, Wolfe Research maintains that a manufacturing partnership with TSMC would be “the best outcome” for Intel, assuming the technical feasibility of integrating Intel's assets with TSMC's operations.

“The technical challenges would undoubtedly be high. But the stakes for INTC are high as well. And the incentive for TSMC would be capacity in the US, elimination of INTC as a competitor, and perhaps some U.S. Government support,” analysts noted.

Separately, Jefferies analysts said the first proposal – TSMC building an advanced packaging facility in the US – “seems most likely", while a JV between the two companies is seen as “the best way to solve INTC’s process technology issues but seems impossible given antitrust issues."

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