Why Intel should outsource its advanced semiconductor manufacturing

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Third Point, LLC, an activist hedge fund, recently urged Intel to revamp its business strategy, including separating its chip design and manufacturing operations. Daniel Loeb, Third Point’s CEO, made the recommendation in a letter to Intel Chairman Omar Ishrak.

Third Point has a $1 billion stake in Intel.

For Intel, committing to such a move and no longer being a world-class, integrated semiconductor company might be a daunting prospect. However, given the global electronic component industry’s current state, it would likely be a positive change. Divesting some of its foundry assets and outsourcing its advanced chip production could be a much-needed shot in the arm.

Outpaced in Chip Manufacturing Technology

Last summer, Intel CEO Bob Swan announced his firm’s 7nm manufacturing process produced suboptimal yields due to a “defect mode.” The company asserted it could fix the problem but delayed the launch of its 7nm central processing units (CPUs). It pushed back the release of its last-generation chipsets from the fourth quarter of 2021 to late 2022 or early 2023.

That means the firm is well behind its rivals in terms of semiconductor node advancement.

Taiwanese Semiconductor Manufacturing Company (TSMC), a contract chipmaker, began rolling out 5nm products last year in the form of Apple’s iPhone and Mac CPUs. TSMC also reportedly developed 5nm nodes for AMD and Nvidia’s future offerings. The pure-play foundry’s current generation production capacity is fully booked through 2021 by Apple, AMD, MediaTek, and Qualcomm.

Samsung developed its own 5nm node, which it used to make its latest flagship smartphone chipsets. The conglomerate is utilizing its leading-edge technology to fabricate Qualcomm’s latest budget and premium handset processors.

Loeb argued Intel’s lack of a competitive manufacturing advantage had created a “human capital management issue” regarding its engineering division.

Chip Design Competition Mounts

Intel is also facing new competition in the chip design space from some former.

Google is reportedly creating processors for its Chromebooks and Pixel smartphones. The search engine provider tapped Samsung to handle its custom semiconductors using its 5nm node

Microsoft used Arm architecture to create new hardware for its Azure cloud computing systems and is considering creating custom CPUs for its Surface line of laptops.

Previously, both corporations depended on Intel for their device and server hardware.

Amazon has also jumped on the self-design bandwagon in recent years. The e-commerce trend recently revealed it developed chips to handle some of its backend cloud services workloads. The firm’s Inferentia division created the silicon to give it a more cost-effective solution to speed up its Alexa and Rekognition processes. Like its cohorts, it used to buy Intel CPUs to support its business.

One big motivator for Google, Microsoft, and Amazon taking the in-house chip-making route is Apple’s success in employing the strategy. The iPhone manufacturer has crafted its smartphone CPUs for years and started using self-made computer processors in 2020. Because it controls both hardware and software development, its components offer superior performance and power consumption.

The other Big Tech giants understand that optimizing their offerings could solidify their market positions.

So, facing intense competition on two fronts, what should Intel do next? First, accept the reality of its situation and take action.

Face the Facts

In October 2020, Swan told investors Intel would take stock of its operations and decide if changes needed to be made in early 2021. He specifically mentioned the firm would consider the viability of utilizing a third-party foundry to make its semiconductors. The executive also said product performance, economic feasibility, and delivery schedules would be its criteria.

With those variables in mind, it is clear that the firm should move to outsource production of its advanced chipsets.

Because of its manufacturing complications, Intel has fallen behind rivals like TSMC and Samsung. By the time its 7nm products go on sale, those chipmakers could be mass-producing 3nm electronic components. In addition, AMD and Nvidia will likely eat into its consumer and corporate market share with their 5nm computer and datacenter processors.

In terms of the third criterion, Intel may run into some issues.

TSMC services are in high demand, so it might not meet all of its fabrication needs right away. However, Intel will have a better sense of the matter once the foundry delivers 180,000 6nm wafers it ordered last year. And TSMC is presently in the middle of a large-scale production capacity expansion.

Intel might feel some hesitancy about depending on Samsung to make its advanced semiconductors. The company’s leadership may worry the conglomerate will prioritize its orders over its own or its competitors. That said, its 7nm node is already massively behind schedule. And it has also encountered issues with its 10nm products, which were supposed to debut in 2016, but came out in 2019.

Using its own barometer, Intel should see the benefits of moving away from being an integrated design manufacturer. Its current leadership has proven it can make large scale changes when necessary, like selling its NAND and storage business to SK Hynix and its smartphone modem assets to Apple.

Now, its executives need to initiate what will be a challenging but essential business transformation.

The Future Lies in Innovation

In the first six months of 2020, Intel generated nearly $40 billion in semiconductor integrated and circuit (IC) revenue. Given how much money its hardware brings in, the company should not sell its entire foundry business. But divesting some of its factories and adopting a more design-centric business model is logical. Because without innovative new chips, its market-leading position will eventually erode.

Despite its recent challenges, Intel still knows how to innovate.

Crown Coffee, a Singaporean coffee bar, used its tech to build an autonomous barista that can take orders and serve beverages. RightHand Robotics, a Massachusetts startup, used its machine vision camera to create a self-directed platform that can precisely pick, sort, and place individual items with little or no human oversight. In the post-pandemic world, those solutions can serve as crucial no-contact workforce supplement tools.

Most impressively, Mobileye, Intel’s self-driving transport subsidiary, developed a breakthrough autonomous vehicle system called Road Experience Management (REM). It utilizes crowd-sourced, high definition mapping data to power its on-board artificial intelligence (AI). One of its cars recently completed an hour-long trip through Munich, Germany’s busy roads and highways, with minimal operator intervention.

Those are just three examples of the many reasons why Intel is still a world-class technology pioneer. If the firm can direct all of its resources to design, it can attract the best engineers and develop more globally transformative solutions. Hopefully, the company’s leaders will decide to stop holding onto the past and embrace the future and its limitless potential.

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