Intel slipped—and its future now depends on making everyone else’s chips
The semiconductor industry, which touches every aspect of our lives now – from cars to electronic gadgets to our social media and Netflix afflictions, is at an inflection point like never before. As this article puts it “the leading edge of semiconductor manufacturing, one of the world’s most profitable, challenging, and cutthroat businesses.” A few weeks ago we featured a piece on TSMC, the largest semiconductor foundry in the world, a monopoly of sorts – see here. This piece is about how the big daddy of semiconductors, Intel is looking to make a comeback. The recent supply chain hold up in the automotive industry due to lack of availability of chips triggered a retort from Intel’s CEO Pat Gelsinger that he’ll put up as much capacity to cater to automotive demand if only automobile makers were to upgrade themselves to the next generation of chips (much like the mobile phone makers) than the obsolete technology they currently deploy – “I’ll make them as many Intel 16 [nanometer] chips as they want…It just makes no economic or strategic sense….Rather than spending billions on new ‘old’ fabs, let’s spend millions to help migrate designs to modern ones.”
This article highlights how Intel is planning to regain its glory in the midst of what seems like indeed a glorious phase for the industry.
“Semiconductors are a hot topic these days,” Gelsinger continued. “What aspect of your life is not being increasingly driven by digital transformation? If there was any question on that, COVID eliminated it.”
Over the last year and a half, as the pandemic has everyone turned to their screens, demand has surged for devices (phones and laptops) and cloud services (Netflix and Zoom), all powered by a range of advanced semiconductors. Manufacturers have raced to squeeze more chips out of their fabs, but many were running near their limits before the pandemic. Still, Intel and its competitors didn’t rush to build new fabs—fabs are startlingly expensive, and without continued demand, semiconductor firms are loath to build more.
But now, as the global pandemic continues to disrupt supply chains, chipmakers have decided that the current spike in demand isn’t going away. Intel’s $20 billion investment is only one example. Samsung announced in May that it would spend $151 billion over the next decade to boost its semiconductor capacity. TSMC made a similar announcement in April, pledging to invest $100 billion in the next three years alone.
The investments required to stay at the leading edge—where the most advanced chips are made—has whittled down the number of semiconductor competitors from more than 20 in 2001 to just two today. “There’s really only so much room at the leading edge, just because of the huge capital costs involved,” said Will Hunt, a research analyst at Georgetown University’s Center for Security and Emerging Technology.
That cost is driven by the price of the equipment that’s required to etch ever-smaller features onto chips. A few years ago, the industry began to use extreme ultraviolet lithography (EUV) to shrink transistor sizes. EUV machines are marvels of physics and engineering, and one tool costs upwards of $120 million. To stay relevant, companies will need to buy a dozen or more annually for the next several years.
For those sorts of investments to make sense, semiconductor manufacturers must produce and sell an enormous volume of chips. “When you have volume orders, then you can do yield experiments, you can improve your yield, and yield is everything because that’s how you cover your costs,” said Willy Shih, a professor of management at Harvard Business School.
….Large foundries have dozens or hundreds of customers, Hu said, which encourages them to take smaller steps because there’s always an interested customer. “When you take bigger steps, there’s more chance of slipping than taking a larger number of smaller steps,” he said. It’s also easier for companies to recover from stumbles.
Intel has historically taken big leaps that attempt to mirror Moore’s law, which describes a doubling of transistor densities every 18–24 months. For most of the company’s history, Intel succeeded, rolling out impressive updates that kept the company one or more steps ahead of its competitors. But then in 2015, it slipped. Intel announced that chips made on its 10 nm node would be delayed. In 2017, it announced another delay. Soon the industry titan wasn’t just even with its competition, it was behind.
At the same time, other companies began to follow Apple’s lead, designing their own chips rather than buying off-the-shelf parts like the ones Intel sold. As TSMC pulled ahead, more companies sent their designs to it, which gave the Taiwanese company more opportunities to refine its processes. Today, around 90 percent of leading-edge chips are manufactured by TSMC, and the rest are made by Samsung.
“Developing a new-generation technology is tremendously difficult,” Hu said. “Intel falling behind TSMC and Samsung in the very leading edge technology can be traced to the fact that Intel did not participate in the foundry.”
…For Intel and the US, embracing the foundry model represents a significant shift. Historically, leading US firms have either functioned as IDMs that design and make chips or as fabless designers that outsource the production to another company, usually in Asia. Part of that is because much of the profit in computer chips comes from designing and selling them, not making them. TSMC’s success as a pure-play foundry “is almost historically anomalous,” said Jennifer Kuan, deputy director of innovation and research at California State University—Monterey Bay. Not only that, but “TSMC has shown that it’s a profitable business,” she added. Many people hadn’t thought it could be.
Now, Intel appears to be going after the foundry business with gusto. So far, Intel has announced Qualcomm and Amazon Web Services as customers, and Klaus Schuegraf, vice president of foundry strategy and planning, said that 100 more companies have expressed interest. “That’s a long order book, and they come from all walks of life.” For now, Intel appears focused on the high-performance market. “We see the growth in the business over the next five, ten years is predominantly from the leading edge,” Schuegraf said.
The true challenge of the foundry market, though, isn’t wooing customers or even developing better technologies—it’s making sure each customer’s needs are served. One thing that sets TSMC apart is its “ability to meet a wide, wide range of customer needs,” particularly those of chip design companies, said Hunt, the Georgetown researcher. “That’s something that Intel does not have that depth of experience with.”