In the age of mobile chips, vertical integration ain't what it used to be.
Intel's (INTC -1.79%) learning that the hard way, as all of its advantages in manufacturing are doing it little favors in gaining meaningful traction in mobile devices. Its earnings release last night is proof of that, as full-year sales in its all-important PC client group were down 3%, even as the chip giant expects to spend another $13 billion on capital expenditures in the coming year.
The microprocessor value chain continues to segment, and when it comes to the chip fabrication part of that equation, Taiwan Semiconductor (TSM -4.86%) is king. The company owned nearly half of the chip foundry market in 2011 and is expected to grow its share this year as manufacturing technologies continue to advance.
The company just reported its fourth quarter figures and posted a 25.4% increase in sales to $4.5 billion. Chairman and CEO Morris Chang said the company has achieved nearly 100% market share in the market for 28-nanometer chip manufacturing and expects wafer shipments to triple in 2013.
Let bygones be bygones
Throughout 2012, TSMC faced hurdles with 28-nanometer chip production that severely hindered several key customers. NVIDIA's new Kepler GPUs saw some supply constraints, while Qualcomm's (QCOM -1.75%) Snapdragon processors and baseband modems were similarly bottlenecked. Those challenges are now in the rearview mirror and TSMC has made a lot of progress ramping up 28-nanometer production.
That manufacturing node was just 5% of total revenue in the first quarter of last year, climbing to 22% of sales in the fourth quarter. Chang said 28-nanometer chip revenue for the full year was $2.1 billion, or roughly 12% of overall 2012 sales. He also expects that figure to rise to $6.2 billion in 2013.
Chang's comments hint that the long-rumored Apple (AAPL -0.57%) deal is in the works. Apple has reportedly already begun trial production of A6X processors on the 28-nanometer process, while currently it still primarily uses Samsung's 32-nanometer process for the A6X. It's also been speculated that Intel has been entertaining the idea of taking on Apple's foundry business, even if that means producing ARM-based processors.
Apple business always entails monster volumes, and the two companies have no known direct relationship right now. Apple indirectly gets chips from TSMC, though, via other chip makers like Qualcomm (baseband modems) and Broadcom (Wi-Fi combo chips), and it's just a matter of time before it ditches Samsung.
Sounds about right
Earlier this month, Citigroup analyst Roland Shu outlined how the foundry market is transitioning to a "new era" focused on technological advancements instead of simply cost reductions. The business is no longer just about borrowing money to build out capacity, but instead relies on heavy investments in new processes.
Shu said that TSMC has a "near-monopoly position" on advanced nodes of 65-nanometer and below, where it's harder for smaller rivals with smaller budgets to keep up. Those advanced nodes comprised 63% of total wafer revenues in the fourth quarter.
The analyst also estimates that Qualcomm comprised 15% of TSMC's volume last year, making it TSMC's largest customer. Qualcomm continues to comprise roughly half of both the smartphone applications processor and baseband modem markets. Eventually, Shu thinks that Apple will become a 10%-plus customer in 2014.
Party like its 2013
Chang noted that TSMC is planning on spending $9 billion in capital expenditures this year, less than the $13 billion that Intel forecast last night. For context, that's more than the entire $5 billion market cap of rival United Microelectronics, who is partnering with IBM via a licensing deal to try and beat TSMC to the 20-nanometer node.
Still, many of TSMC's processes are increasingly proprietary, making its customer base more reliant on its manufacturing capabilities. Shares gained 29% last year, and look set to also have a good 2013.
