Why Intel Should Open Their Fabs for Outsourcing Processors

In a meeting I once had with former Intel CEO Paul Otellini, he told me that Intel had to have all of their fabs running at full capacity for Intel to stay profitable. Intel is still profitable, largely due to solid ASPs and margins, but it appears not all the fabs are running at full capacity. When Otellini mentioned this data point to me, the PC demand was very strong. That year, the industry sold close to 400 million PCs. Today we sell only around 280 million PCs per year at best.

The good news for Intel is that while they are selling fewer PC chips, they are selling millions of chips for servers, which ultimately helps to keep the fabs humming even all fabs are not running at 100% capacity. One of the reasons I, and many others, think Intel should be more willing to help fabless companies produce their chips in Intel Fabs is that demand for non X86 processors is running high. Existing fabs, like the ones from TSMC, and Samsung, are almost at capacity, and they are getting new orders every day.

Every report I have read by semiconductor industry experts suggests that demand for new and advanced processors will continue to rise. Add dedicated AI chips, IoT chips, and new types of sensors and camera processors, and one can see how our current fabs could struggle to keep up with the demand. Then the is one other political concern that could be problematic with existing fabs that already exist.

I wrote an article a few weeks ago about the concerns around China and its aggressive interest in Taiwan. I mentioned that for the first time, I had heard real concerns from major Taiwanese execs that China could be moving faster than expected to bring Taiwan under its control. Since I wrote that piece, one other concern from top Taiwan execs is related to TSMC. Should China invade Taiwan, or at the very least, try and create a Hong Kong like international trade environment but under stricter China-based security rules, as they have recently done in Hong Kong, how would that impact Taiwan based business?

My sources in Taiwan have even asked what happens if China makes TSMC a Chinese company and asserts more control over it. While that is highly unlikely, these are the hard questions I am hearing from top manufacturing execs in Taiwan, who are more concerned than ever about China asserting their rule inside Taiwan. This increased demand should be seen by Intel as a major opportunity to bolster its long-term profitability. While they do have a strong position in PC’s and servers, to put all of their future growth eggs in this basket could, at some point, limit their long term potential. I understand they have other areas of focus that could help their growth, which includes smart cars, AI, and other markets for focused chips. But would those chips keep their factories at full capacity?

Ironically, Intel’s struggle to move to 7nm processes has forced them to think about outsourcing advanced processors to competitors such as TSMC. In an article in the Oregonian, it reports that Intel has confirmed that it is looking at outsourcing advanced processors.

CEO Bob Swan told Wall Street analysts on a conference call earlier this month that it may outsource advanced production to its rivals – he named Taiwan Semiconductor Manufacturing Co., specifically – to ensure “a predictable cadence of leadership products.” Swan told investors to expect a decision by late January.

On this month’s analyst call, Swan said Intel believes it can have it both ways – sending advanced production overseas while retaining internal production for components and older products that don’t require the most sophisticated technology. And Swan said Intel believes it could restore advanced manufacturing to its own factories sometime in the future if it chooses to.

This type of move would leave Intel’s own factories open to make chips for others, especially some Arm-based processors that don’t need advanced manufacturing processes. The challenge for Intel, and the tough pill to swallow, would be that in order to do this they would have to allow their fabs to use other companies process technology. If Intel was to offer TSMC and Samsung space in their fabs, both companies would use their proprietary process and Intel would basically be leasing space and equipment.

Intel still has fabs all over the world that could be utilized for making processors for Fabless semi-conductors firms and keep existing fabs going strong. Although this would upend Intel’s historical business model, this might be the time for them to seize the moment and go down a path that keeps all of their fabs humming.

Published by

Tim Bajarin

Tim Bajarin is the President of Creative Strategies, Inc. He is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM, Apple, Xerox, Compaq, Dell, AT&T, Microsoft, Polaroid, Lotus, Epson, Toshiba and numerous others.

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