Intel considers Chip Outsourcing

By: Mauricio RIVERA — Posted 2021 Jan 11 under NEWS

Samsung surges after Intel considers chip outsourcing — Is Intel "Focusing on what it does best" or "Giving away the family jewels"?

Assigned Tags: Innovation / Risk-Management / Supply-Chain /

BLOOMBERG.COM just wrote an article about SAMSUNG stocks surging after INTEL said that they were considering outsourcing chip fabrication to SAMSUNG (Samsung Electronic Corporation) and TSMC (Taiwan Semiconductor Manufacturing Co.), two firms that are arguably the current world leaders in semiconductor chip fabrication.

I found this very interesting, since INTEL literally made its name by fabricating the processor chips first used by the IBM PC (the Intel 8088 microprocessor) — all the way to recent times (the 10th generation Core COMET LAKE CPUs). Intel CPU processors are used in most Windows-based personal computers, the sole competitor in that marketspace being AMD at this point in time.

Recent production issues for INTEL have put it in a precarious position — attributable to its inability to move to a smaller manufacturing process, which is currently at 14nm (nanometers). It must be said, however, that the different manufacturing processes cannot be compared directly — due to nanometer reference values being determined differently between manufacturers. So, at the end of the day, SAMSUNG's 7nm chips may not be 2x faster / efficient than INTEL's 14nm chips, as performance depends on the manufacturing process AND the chip design.

But as a general rule, a processor built using a 7nm process should perform significantly better than a chip built using a 14nm process.

AMD's chip offerings are currently at 7nm — and smaller manufacturing processes provide a significant boost in either processing performance (for desktop and mobile chips) and / or power efficiency (for mobile chips). Apple recently announced that it will start using its own chips, rather than those made by INTEL; a decision most probably at least partially influenced by INTEL's lagging behind in technological breakthroughs.

With INTEL's production capability lagging behind, is it a good idea to consider outsourcing? Or should it just get its act together and continue doing what made it a semiconductor manufacturing powerhouse for over 50 years?

Let's see the PROS and CONS of each option, and then let's see which option seems to be the better choice.


INTEL CHIP PRODUCTION — Inhouse vs Outsource

PROS
INHOUSE OUTSOURCE
  • Full control over production schedules, priorities and process
  • Keep design confidential
  • Earn from chip production
  • Minimize investment in fabrication facilities
  • Can produce 5nm / 7nm designs now
  • Can focus resources on chip design
  • Should be able to reduce fixed costs
CONS
INHOUSE OUTSOURCE
  • Unable to produce 5nm / 7nm chips at the moment — which may result in lost sales to competing chips ... TSMC already has hinted at being able to produce 3nm chips sometime 2022
  • Fixed costs include maintaining the fabrication facilities
  • Will be playing catch-up to competitors, and may be unable to catch up in the future
  • Possible leaks of confidential designs
  • Outsourcing fees
  • Production scheduling / priority dependent on Fabricator availability
WHO DOES IT?
INHOUSE OUTSOURCE
  • SAMSUNG
  • INTEL
  • TSMC (does not use the chips it produces)
  • GlobalFoundries (does not use the chips it produces)
  • APPLE
  • AMD
  • NVIDIA
  • IBM
  • QUALCOMM
KEY FACTORS TO CONSIDER
INHOUSE OUTSOURCE
  • Can INTEL chip performance still catch up to competitor offerings?
  • Costs for INTEL to ramp up to newer manufacturing processes
  • Ability to maintain competitive production costs, based on volume and yield
  • Ability to bring new models to market quickly
  • Ability to resolve issues that plagued their 14nm production process (and trials to move to a smaller process)
  • Expected demand for INTEL chips in the coming years, including capability to maintain optimal production volumes
  • Government incentive(s) for INTEL to keep chip production in-house, if any
  • Capability to book production with chip producer, both in the short term and in the long term
  • Remaining chip margins after paying chip producer
  • Savings generated by reducing inhouse production, if any
  • Possible loss of face due to outsourcing chip production
  • Supply Chain risks due to outsourcing production
  • Volatility of the political / economic climate, which could increase risks if chip production is outsourced

So what should INTEL do?

With the limited information we have on hand, the most prudent approach would be the path INTEL plans to take at the moment — which is to continue inhouse production while outsourcing other chips.

A very safe decision, but it has the smell of indecisiveness. But considering what is at stake, it might be acceptable to be indecisive at this point. All of this just strikes home the fact that this is a battle for survival, not some minor decision to be made at a whim.

Although it is tempting to say that outsourcing seems to make a lot of sense — especially when you point out that APPLE, AMD, NVIDIA, IBM and QUALCOMM are all doing it — only AMD, NVIDIA and QUALCOMM are in the (direct) chip selling business. APPLE and IBM purchase and use the chips that are outsourced and incorporate them into the hardware they sell, so their use case model is different.

So looking at AMD, NVIDIA and QUALCOMM — these chip sellers basically rely on their chip designs being much better than the competitors. Focusing on chip design, rather than chip design and production, allows them to focus on what is important to them.

INTEL has remained at the top of its game for over 50 years. It is hard to believe that it has no chance regain its previous standing as the technological leader of the microprocessor industry. It definitely won't be beyond them to take the steps needed to get back on track.

Barring that, we are sure that SAMSUNG and TSMC will be more than happy to help them out by producing their chips.