The New "Mobile Foundry" Era: Whose Wheelhouse?

Nothing seems to raise the Visceral Ire of Semiwiki readers like the two words: Intel and Foundry. To get maximum steam coming out of the ears make sure you combine the two words in a sentence. Something along the lines like: Intel is Now Going to be a Leader in the Foundry Business. Pause…..Ok catch your breadth and now let’s move on :). After reading the comments to my column from last week, I have come to the conclusion that our understanding of “Foundry” is also about to change dramatically. As Dan Nenni points out, in addition to Intel, both TSMC and Samsung are adding massive amounts of leading edge capacity – and why not there are billions of dollars and units at stake for as the eye can see. Our current view of Foundry is about to be encapsulated as “Legacy Foundry” as we enter the era of the high volume “Mobile Foundry.” If anyone else has a better term then lets bring it to the table because this will be significant.

Arguments made back forth try to sway the opinions of readers that Intel can never play in the foundry game due to lack of IP, tools support and pricing. I totally agree when it comes to playing in TSMC’s 40nm and below sand box or high volume commodity chips. This is completely out of the realm of Intel’s capabilities and interest for that matter. But the Billions of units a year mobile market is well within Intel’s wheelhouse and they will claim their advanced, low power Finfet process technology is their competitive edge that can benefit all. The two major mobile horses: Apple and Samsung who claim 80% of the market are standardizing on a small number of components that drive the steep step function ramps that occur multiple times a year. Intel has a long history of high volume step function ramps and is living in a market (i.e PCs) that has a nearly 400MU TAM based on larger die. Ramping capacity with high yield for what will be 6 month product cycles is key.

Before going forward, one has to come to the conclusion that Intel has only one path forward. Yes, it will continue to thrive in a $40+ x86 market serving PCs and servers. However, if they don’t pursue the larger mobile market than over time TSMC and Samsung will overwhelm them and the ability to reinvest in process technology as they have in the past will be at risk.

As an example of how this plays out lets look at Cirrus Logic. In all the iPAD and iPhone tear downs there are one or two components from Cirrus. They shipped over 200MU into Apple last year. Furthermore they were a captive supplier with 80% of their business tied to Apple. In this new mobile market, Apple will be driving Cirrus to reduce supply risk while lowering costs and power. If Cirrus blew up, Apple’s freight train would grind to a halt. In addition, the Cirrus parts come with custom features that only Apple gets to enable for their devices.

Last year it was rumored that Apple financed the ramp of Cirrus Logic’s components because the cash outlay required for the enormous production ramp in Q3 was to put it mildly a challenge. Cirrus grew revenue 100% from Q2 to Q3 and another 50% in Q4. One could see a scenario where Intel would offer a financing deal to have Cirrus move production to its fabs, especially since it has the ability to raise billions of dollars at interest rates below 3%. This is a sign of things to come in the Foundry industry. Free financing will no longer be just the realm of auto companies (notice what heavy capex does to an industry). In addition, Intel would likely make the argument that hiding new products in an Intel Fab and away from Android system players who live cross-town from TSMC could be an added benefit as confidential production ramp schedules could remain stateside. My bet is that the two are talking.

Apple has developed a plan of alternating processors in different platforms based on whether it is a premium device (iphone 5) or last year’s model (ipad mini). This reduces risk in the supply chain. There is however an interesting twist in Apple’s processor development. They are experiencing what Intel saw in the 1990s and that is an insatiable demand for more performance, albeit under a more strict power curve. They need to stretch their capabilities at the front end in order to justify the $650 price tag of their latest iphone. If they leverage Intel’s fab process then they could conceivably pick up another 2X overnight at an even lower power. What if they paid Intel an extra $10-$15 – it would be worth it. Tools: let Intel engineers do the port. IP: courtesy of Apple Inc.

What about Qualcomm and Broadcom? They will be called on to make versions of their chips specifically for Apple and Samsung. Again it will be necessary to hide the different versions. Think of it this way. If Qualcomm makes one version of their 4G LTE chip and it is built at one Fab, let’s say TSMC, then both Samsung and Apple know the schedule of production and build products around it. Therefore Apple and Samsung know that their product releases will be in sync and reduce the advantage that one vendor can have over the other. If instead, Apple has Qualcomm build a custom baseband chip at a different foundry than what the Qualcomm version is for Samsung or the rest of the Android market, then it is possible for them to hit the market with a different feature set and timing than its competitors. This will be critical in maintaining higher hardware ASPs. Mere months can be the difference in high and mediocre profits.

As mentioned in a previous blog, Intel was operating under two business plans during the last three years. Andy Bryant was running the manufacturing footprint side while Paul Otellini was charged with winning mobile with internal products. Otellini succeeded in his efforts to win the PC market through a cannibalization low TDP strategy, however he lost the smartphone and tablet space to Samsung and Apple who decided it was key to develop their own processors. Now Intel’s opportunity is to shift to the Bryant plan, which is to be a foundry to the Billions of mobile devices outside of the PC market.

I expect that we will not fully understand how this new “Mobile Foundry” model shakes out until several years down the line when the smartphone and tablet markets show growth of just a low double-digit rate. In some ways it is reminiscent of the early 1990s when PC growth took off and the investment in chip startups and Fabs was at its peak. The first instance of a slow down occurred in September 1995 when Microsoft launched Win 95 and companies like Micron and Cirrus hit the wall and the mothballs came out. TSMC, Samsung and Intel have probably developed a multi-year business plan that is based on growth rates that one day reach a drop off. Mothballs will come out. However for now, to underinvest is to ensure losing early, to overinvest is to lay it all on the line and hope the other guy comes up short.