Tower Semiconductor is expanding its semiconductor manufacturing footprint in Japan with a planned investment of approximately $3 billion, backed by $1 billion in grants from the Japanese government, as the company seeks to capitalize on rising demand for technologies that connect artificial intelligence systems and data centers.

Tower Semiconductor shares surged almost 19% in premarket trading on Tuesday.

The Israeli chipmaker announced a dual-track expansion plan that will significantly increase its production capacity for 300mm Silicon Photonics (SiPho), Silicon Germanium (SiGe), and advanced optical packaging. The technologies are becoming increasingly important as AI systems require faster and more efficient connections between processors and data infrastructure.

The expansion will take place through Tower’s Japanese operations, including facilities acquired through its majority ownership of TPSCo, the former Panasonic Semiconductor manufacturing business.

The first phase of the plan focuses on quickly increasing existing capacity. Tower will convert the Arai facility, formerly known as Fab 6, into a production site for 300mm Silicon Photonics and advanced packaging, while maximizing output from its existing Fab 7 facility in Uozu.

Tower expects this phase to reach full production readiness in the fourth quarter of 2027.

As part of the expansion, the company updated its business model and said it now expects to reach $3.6 billion in revenue and $1.2 billion in net profit in 2028.

The second phase involves constructing a new 300mm manufacturing facility adjacent to Fab 7. The company said the new site is expected to provide a "multi-fold" increase in Silicon Photonics and Silicon Germanium capacity and support growing demand from customers developing AI and data center applications.

The new facility is expected to begin making a significant financial contribution from 2029.