Geopolitics could give U.S. tech giant's contract chipmaking strategy a boost
PALO ALTO, U.S./TAIPEI -- Since returning to Intel as CEO in early 2021, Pat Gelsinger has been on a mission: transform America's biggest semiconductor company into a major contract chipmaker.
Pulling off such a transformation would reshape the global chipmaking landscape at a time of unprecedented geopolitical tensions over control of this crucial technology. The U.S. is pouring billions into its domestic chip sector and clamping down on China's own ambitions, while Beijing is desperately trying to break its reliance on foreign technology.
But manufacturing chips for outside customers -- also known as the foundry business -- is new territory for Intel, which has built its reputation designing and making its own cutting-edge semiconductors for PCs and servers. Asian rivals, moreover, have dominated the global foundry market for decades.
Foraying into contract chipmaking also puts Intel in direct competition with two of its own suppliers, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.
And it is an expensive strategy. Since Gelsinger, who previously worked at Intel from 1979 to 2009, announced the pivot in March 2021, the company has planned spending of over $70 billion for building and expanding its chip fabrication facilities, or fabs.
Intel is attempting a pivot into the foundry business, or making chips for outside customers, an area long dominated by Asian rivals. © Intel
None of that has stopped Intel from setting its sights high.
"Our ambition is to be the No. 2 foundry in the world by the end of the decade, and [we] expect to generate leading foundry margins," Randhir Thakur, the president of Intel Foundry Services, told Nikkei Asia. IFS was set up last year to turn Gelsinger's vision into a reality.
For Intel, such a move is not only a new potential revenue source, but also a way to regain a technological edge in chip manufacturing lost to Asia over the past decades.
Investors, however, do not seem entirely convinced: Intel's share price has more than halved since it embarked on its foundry transformation.
The company's spending in this area includes $20 billion for a chip facility in Ohio and 17 billion euros ($16.8 billion) to build a plant in Germany, as well as $3.5 billion to expand its chip packaging facility in New Mexico, a $20 billion investment in Arizona fabs and a 17 billion euro expansion in Ireland. On top of that, Intel acquired Israeli foundry Tower Semiconductor for $5.4 billion in February.
Meanwhile, slowing global demand for chips has weighed on Intel's top line. The company reported a 20% year-over-year drop in third-quarter revenue last week, and lowered its 2022 full-year revenue outlook to between $63 billion and $64 billion, down as much as $4 billion from its previous guidance.
Coupled with the heavy spending on its foundry business, Intel is now expecting to end 2022 with a negative $2 billion to $4 billion free cash flow, compared to the negative $1 billion to $2 billion it projected earlier this year.
While investors may have doubts, however, analysts and industry insiders say Intel's foundry strategy is "sensible" and massive upfront investments are simply the price the company must pay to make it work.
"For an IDM [integrated device manufacturer] like Intel to really survive, there are only a couple of things that they can do. They can either grow and get scale, or they specialize," said Wayne Lam, senior director of research at CCS Insight, an industry analysis company.
David Crawford, head of the global technology and cloud services practice at consultancy Bain & Co., agreed.
"I think it's a very sensible strategy for Intel to scale into the fabrication business, yet it is not for the faint of heart," Crawford said. "You're either in or you're out. The worst strategy for someone like Intel is to be middling."
But to scale up, Intel must win over customers, something it has so far struggled to do.
Intel has previously said that Qualcomm, Amazon's AWS and MediaTek have signed up to use its manufacturing services. It did not announce any new foundry customers for the July-September quarter.
During the same period, IFS revenue dropped 2% on the year to $171 million, following a 54% year-over-year drop in the previous quarter.
One reason Intel has struggled to win over customers is the formidable competition from the market leaders.
TSMC -- the world's largest contract chipmaker -- controlled over 53% of the global foundry market in the first half of this year, research company Trendforce said. Samsung was in second place, with a 16.5% share. TSMC only makes chips for others and counted most of the world's top chip developers -- from Apple, Qualcomm and Nvidia to Broadcom -- as key customers
Samsung mainly builds chips for its in-house use but has become more serious about its foundry business over the years. In 2019 it announced it would spend 133 trillion won ($115 billion) by 2030 to expand its chip design unit and foundry business.
Intel lags behind both of these companies in semiconductor manufacturing technology as gauged by how many transistors they can squeeze onto a single chip. This is measured in nanometers -- a smaller number means less space between transistors and, generally speaking, indicates a more advanced chip.
TSMC and Samsung both began production of industry-leading 3-nanometer chips this year and aim to put 2-nm chips into production by 2025. Intel has still not been able to mass-produce 5-nm chips, which are widely used in advanced electronics like smartphones.
For its foundry business to succeed, Intel will have to do more than catch up on the tech front, according to Charles Shi, a semiconductor analyst with Needham & Co. After decades of making chips primarily for its own use, the company must learn how to serve a wide range of external customers with varying needs, he said. Intel also needs to build up a third-party intellectual property portfolio, design services, and a chip packaging and testing ecosystem with partners to make it easier for customers to use Intel's manufacturing process.
"Intel has taken initiatives to address these changes, but so far, there is no evidence to show any of these hurdles have been overcome," Shi said.
Samsung of South Korea has begun mass-producing chips using the industry-leading 3-nanometer production technology, something only Taiwanese rival TSMC has also achieved so far. © Samsung
Intel is still working on getting its 5-nm mass production going, and says it will begin manufacturing Intel 3 -- its answer to TSMC's 3-nm tech -- in the second half of 2023. Intel 18A production, intended to compete with TSMC's 2-nm chips, is slated to start in the second half of the following year.
Any major setback to those plans would mean more pressure on the company's cash flow and from investors.
"If they run into another incident where they fall back two generations [in chip production technology], they are done for," said Lam at CCS Insight.
Amid all the challenges, one external factor could give Intel's strategy a boost: geopolitics.
"If you asked me five years ago whether Intel could get some business in the foundry space, there is no doubt I would have said no," a veteran Taiwanese chip executive told Nikkei Asia, declining to be named because his company has business with both TSMC and Intel. "But if you asked me now, I think Intel does have some opportunity because of Washington's rhetoric of diversification amid mounting geopolitical pressure in Asia, especially between Taiwan and China."
The U.S. government has been ramping up efforts to bring chip production onshore amid tensions with China and a global chip shortage that emerged amid the COVID-19 pandemic.
The question now, the Taiwanese executive said, is how well Intel can monetize those concerns and grow its foundry business.
Intel CEO Pat Gelsinger, left, and U.S. President Joe Biden attend the groundbreaking ceremony of the chipmaker's manufacturing facility in New Albany, Ohio, on Sept. 9. © AP
Intel itself is optimistic it can seize this opportunity.
"As we have engaged with foundry customers since launching IFS, it has become abundantly clear that many of these companies see the need for a more resilient and geographically balanced semiconductor supply chain," IFS President Thakur told Nikkei Asia.
Intel was a key advocate for the passage of the CHIPS Act, which will funnel more than $50 billion in federal money into the semiconductor industry. State money has also supported Intel's foundry venture. The company has received grants and tax breaks from Ohio, New Mexico and Arizona.
But TSMC and Samsung are also expanding their production footprints in the U.S., and they have long relationships and proven track records with their clients.
Still, shifting political tides could give Intel the chance it has been waiting for, said Needham & Co.'s Shi.
"The opportunity is always there for Intel, as the geopolitical risk is rising not only for TSMC but also for Samsung," Shi said. "We may be heading toward some fundamental changes to the geopolitical landscape in Asia over the next decade."
asia.nikkei.com
PALO ALTO, U.S./TAIPEI -- Since returning to Intel as CEO in early 2021, Pat Gelsinger has been on a mission: transform America's biggest semiconductor company into a major contract chipmaker.
Pulling off such a transformation would reshape the global chipmaking landscape at a time of unprecedented geopolitical tensions over control of this crucial technology. The U.S. is pouring billions into its domestic chip sector and clamping down on China's own ambitions, while Beijing is desperately trying to break its reliance on foreign technology.
But manufacturing chips for outside customers -- also known as the foundry business -- is new territory for Intel, which has built its reputation designing and making its own cutting-edge semiconductors for PCs and servers. Asian rivals, moreover, have dominated the global foundry market for decades.
Foraying into contract chipmaking also puts Intel in direct competition with two of its own suppliers, Taiwan Semiconductor Manufacturing Co. and Samsung Electronics.
And it is an expensive strategy. Since Gelsinger, who previously worked at Intel from 1979 to 2009, announced the pivot in March 2021, the company has planned spending of over $70 billion for building and expanding its chip fabrication facilities, or fabs.
None of that has stopped Intel from setting its sights high.
"Our ambition is to be the No. 2 foundry in the world by the end of the decade, and [we] expect to generate leading foundry margins," Randhir Thakur, the president of Intel Foundry Services, told Nikkei Asia. IFS was set up last year to turn Gelsinger's vision into a reality.
For Intel, such a move is not only a new potential revenue source, but also a way to regain a technological edge in chip manufacturing lost to Asia over the past decades.
Investors, however, do not seem entirely convinced: Intel's share price has more than halved since it embarked on its foundry transformation.
The company's spending in this area includes $20 billion for a chip facility in Ohio and 17 billion euros ($16.8 billion) to build a plant in Germany, as well as $3.5 billion to expand its chip packaging facility in New Mexico, a $20 billion investment in Arizona fabs and a 17 billion euro expansion in Ireland. On top of that, Intel acquired Israeli foundry Tower Semiconductor for $5.4 billion in February.
Meanwhile, slowing global demand for chips has weighed on Intel's top line. The company reported a 20% year-over-year drop in third-quarter revenue last week, and lowered its 2022 full-year revenue outlook to between $63 billion and $64 billion, down as much as $4 billion from its previous guidance.
Coupled with the heavy spending on its foundry business, Intel is now expecting to end 2022 with a negative $2 billion to $4 billion free cash flow, compared to the negative $1 billion to $2 billion it projected earlier this year.
While investors may have doubts, however, analysts and industry insiders say Intel's foundry strategy is "sensible" and massive upfront investments are simply the price the company must pay to make it work.
"For an IDM [integrated device manufacturer] like Intel to really survive, there are only a couple of things that they can do. They can either grow and get scale, or they specialize," said Wayne Lam, senior director of research at CCS Insight, an industry analysis company.
David Crawford, head of the global technology and cloud services practice at consultancy Bain & Co., agreed.
"I think it's a very sensible strategy for Intel to scale into the fabrication business, yet it is not for the faint of heart," Crawford said. "You're either in or you're out. The worst strategy for someone like Intel is to be middling."
But to scale up, Intel must win over customers, something it has so far struggled to do.
Intel has previously said that Qualcomm, Amazon's AWS and MediaTek have signed up to use its manufacturing services. It did not announce any new foundry customers for the July-September quarter.
During the same period, IFS revenue dropped 2% on the year to $171 million, following a 54% year-over-year drop in the previous quarter.
One reason Intel has struggled to win over customers is the formidable competition from the market leaders.
TSMC -- the world's largest contract chipmaker -- controlled over 53% of the global foundry market in the first half of this year, research company Trendforce said. Samsung was in second place, with a 16.5% share. TSMC only makes chips for others and counted most of the world's top chip developers -- from Apple, Qualcomm and Nvidia to Broadcom -- as key customers
Samsung mainly builds chips for its in-house use but has become more serious about its foundry business over the years. In 2019 it announced it would spend 133 trillion won ($115 billion) by 2030 to expand its chip design unit and foundry business.
Intel lags behind both of these companies in semiconductor manufacturing technology as gauged by how many transistors they can squeeze onto a single chip. This is measured in nanometers -- a smaller number means less space between transistors and, generally speaking, indicates a more advanced chip.
TSMC and Samsung both began production of industry-leading 3-nanometer chips this year and aim to put 2-nm chips into production by 2025. Intel has still not been able to mass-produce 5-nm chips, which are widely used in advanced electronics like smartphones.
For its foundry business to succeed, Intel will have to do more than catch up on the tech front, according to Charles Shi, a semiconductor analyst with Needham & Co. After decades of making chips primarily for its own use, the company must learn how to serve a wide range of external customers with varying needs, he said. Intel also needs to build up a third-party intellectual property portfolio, design services, and a chip packaging and testing ecosystem with partners to make it easier for customers to use Intel's manufacturing process.
"Intel has taken initiatives to address these changes, but so far, there is no evidence to show any of these hurdles have been overcome," Shi said.
Samsung of South Korea has begun mass-producing chips using the industry-leading 3-nanometer production technology, something only Taiwanese rival TSMC has also achieved so far. © Samsung
Intel is still working on getting its 5-nm mass production going, and says it will begin manufacturing Intel 3 -- its answer to TSMC's 3-nm tech -- in the second half of 2023. Intel 18A production, intended to compete with TSMC's 2-nm chips, is slated to start in the second half of the following year.
Any major setback to those plans would mean more pressure on the company's cash flow and from investors.
"If they run into another incident where they fall back two generations [in chip production technology], they are done for," said Lam at CCS Insight.
Amid all the challenges, one external factor could give Intel's strategy a boost: geopolitics.
"If you asked me five years ago whether Intel could get some business in the foundry space, there is no doubt I would have said no," a veteran Taiwanese chip executive told Nikkei Asia, declining to be named because his company has business with both TSMC and Intel. "But if you asked me now, I think Intel does have some opportunity because of Washington's rhetoric of diversification amid mounting geopolitical pressure in Asia, especially between Taiwan and China."
The U.S. government has been ramping up efforts to bring chip production onshore amid tensions with China and a global chip shortage that emerged amid the COVID-19 pandemic.
The question now, the Taiwanese executive said, is how well Intel can monetize those concerns and grow its foundry business.
Intel itself is optimistic it can seize this opportunity.
"As we have engaged with foundry customers since launching IFS, it has become abundantly clear that many of these companies see the need for a more resilient and geographically balanced semiconductor supply chain," IFS President Thakur told Nikkei Asia.
Intel was a key advocate for the passage of the CHIPS Act, which will funnel more than $50 billion in federal money into the semiconductor industry. State money has also supported Intel's foundry venture. The company has received grants and tax breaks from Ohio, New Mexico and Arizona.
But TSMC and Samsung are also expanding their production footprints in the U.S., and they have long relationships and proven track records with their clients.
Still, shifting political tides could give Intel the chance it has been waiting for, said Needham & Co.'s Shi.
"The opportunity is always there for Intel, as the geopolitical risk is rising not only for TSMC but also for Samsung," Shi said. "We may be heading toward some fundamental changes to the geopolitical landscape in Asia over the next decade."
How Intel plans to rival TSMC and Samsung as a chip supplier
Geopolitics could give U.S. tech giant's contract chipmaking strategy a boost
asia.nikkei.com
But anyway you are wrong starting at 18A. This is the new Intel not the old Intel. The new Intel will have too much capacity unless they cut CAPEX in half moving forward, which could certainly happen.