intel_d1d_olivia_2007_crop.JPG
Intel rarely lets outsiders into its factories (this photo, of a Hillsboro factory called D1D, is from 2007. But now itas begun opening its factories to make chips for other companies. Observers are still guessing at Intelas goals as it moves into contract manufacturing.
(Olivia Bucks/Oregonian file photo)
Intel boasts the world's most advanced technology for mass production of computer chips, working a year or two ahead of its rivals in shrinking circuitry and boosting computing speeds.
It develops and hones that technology at its research factories in Hillsboro, where Intel invests billions of dollars every year to advance its production process and extend its lead.
No one else gets a look at that technology; no one else gets to use it. Intel has jealously guarded its factories, known in the industry as fabs, a key to the company's dominance in the PC market.
Nobody else. Until now.
With the PC industry ebbing, and mobile device manufacturers choosing designs from Intel rival ARM Holdings, Intel is rethinking its approach. The company has begun making small quantities of chips for other companies, using its industry-leading technology.
To date, though, Intel has eschewed really big customers in favor of niche markets. The world's largest chipmaker says it's still learning to be a contract manufacturer, and that it won't make chips for its competitors.
That leaves investors and observers wondering about Intel's strategy. Is it merely testing the waters? Or is contract manufacturing a fallback strategy in case Intel's own mobile initiative fails, or the PC market implodes?
"Let's face it: The big opportunities out there are all ARM-based chips," said Jim McGregor, who watches Intel for Tirias Research in Arizona.
Intel's foundry customers
What
: A foundry is a contract manufacturer of computer chips.
Who
: Intel has announced five foundry customers so far: Achronix, Tabula, Netronome, Microsemi and Altera. Thus far, only Achronix is shipping.
Technology
: Intel will make Altera's chips using its forthcoming 14-nanometer manufacturing process. All the other customers will receive less advanced 22-nm circuitry.
What's next
: Several news outlets have reported that Intel will also make chips for Cisco Systems, but the companies have not confirmed that.
In the chip industry, contract manufacturers are known as foundries. A handful of big companies dominate the $30 billion foundry market, led by Taiwan Semiconductor Manufacturing Co., which owns the WaferTech fab in Camas, Wash.
Intel's fabs are full at the moment, but the company has warned that it expects flat sales this year even as construction winds down on two big new factories due to open this year, one in Hillsboro and one in Arizona.
With yet another fab now under construction in Hillsboro, and sales flat over the past two years, that could leave Intel more capacity than it needs for years to come unless it can fill the fabs with other companies' products.
Intel eased into foundry work under former Chief Executive Paul Otellini, who retired in May. Otellini articulated a "crawl, walk, run strategy."
Early contracts are with relatively small chip companies that can't afford their own factories. The biggest deal is with Altera, which makes a kind of programmable computer chip that provides a supporting role in electronic devices. It doesn't compete with Intel's microprocessors, which provide a computer's brain.
Most of Intel's clients will use technology just behind the leading edge, but Altera will get Intel's top-shelf, 14-nanometer manufacturing technology. Because it takes two to three years to establish a manufacturing process for a new client, Otellini said it would be some time before foundry work could provide significant revenue to Intel.
Three rules
And in April, shortly before his retirement, Otellini set out three rules for Intel's foundry work:
- Intel will charge a premium for its advanced manufacturing technology.
- "We would not enable a chip competitor."
- Intel will seek a "strategic relationship with a customer so that it went beyond just a single foundry transaction."
New Chief Executive Brian Krzanich, who served as Otellini's chief operating officer, has given no indication that he's reconsidering his predecessor's course. That could limit the size of the foundry market.
The second rule in particular, about not enabling a chip competitor, seems to rule out a large segment of the market, the segment using mobile chips based on ARM's customizable designs.
Maybe not, said McGregor, the Tirias researcher.
"Intel does like to play a little bit with its words," McGregor said.
"It doesn't like to call Apple a competitor, even though Apple is a competitor. They call Apple a customer," he said, because Apple buys Intel chips for iMacs and MacBooks.
Wall Street analysts speculate fervently about the possibility of Intel making Apple's ARM-based mobile chips. There's no indication a deal is on the table -- indeed, recent reports have Apple leaving Samsung for TSMC to make ARM-based chips for iPhones and iPads.
Whatever Intel may say about contract manufacturing and competitors, Intel wouldn't stand on principle if it had an opportunity with Apple, said Scotten Jones, president of IC Knowledge, said that Intel wouldn't stand on principle if it had an opportunity with Apple. It's just too big a deal to pass up.
"If they could get Apple as a customer, and run Apple A-series cores, I think they'd do that in a heartbeat," Jones said. "I think they'd be crazy not to."
Not giving up on mobile
Others caution that if Intel starts producing ARM chips it essentially would be surrendering the mobile chip market to rival technology. By giving ARM designs access to Intel's leading-edge manufacturing, they said, Intel would be cementing ARM's mobile dominance.
And Intel is certainly not ready to give up on mobile.
Its new Silvermont microprocessor has won strong reviews for its speed and energy conservation, and Intel plans to bring its latest manufacturing technology to its mobile processors next year.
Further, an aggressive move into foundry work could compromise Intel's hefty operating profit margins, which run near 60 percent.
If Intel finds itself bidding against TSMC or others to win business from, say, Apple, then it might force down prices and profit margins. Intel's go-slow approach preserves the company's margins, taking on additional business only as the company has capacity to manage it.
Ultimately, though, Jones said that Apple may have to accept lower margins as the cost of maintaining its market-leading technologies.
The price tag for a state-of-the-art, mass production fab runs north of $5 billion. It costs billions of dollars more every year to keep them equipped for the latest production technology.
If PCs aren't keeping Intel's fabs full, and Intel's mobile business isn't picking up the slack, then contract manufacturing could be the best bet for recouping the construction and tooling costs.
"You need to expand that out over enough wafers and enough volume to justify the investment," Jones said.
If Intel sees things that way, it isn't letting on. On a conference call with investment analysts this month, Krzanich signaled only that he remains cautious.
"You really want to make sure that the systems and the customer support models that you have are in place to handle the volume that you're really taking on," the new CEO said. "Since we haven't been a foundry business all our life, we wanted to go and make sure we really knew what we were doing there."
-- Mike Rogoway; Twitter: @rogoway; phone: 503-294-7699