Intel Opens Door to Contract Chip Manufacturing

Intel on Tuesday said the company would begin contract manufacturing of chips, a change from the company's policy of serving only itself through its factories.

The company earlier this week said it would make a line of FPGA (field-programmable gate array) products for Achronix Semiconductor using its upcoming 22-nanometer manufacturing process. Intel will start manufacturing chips for laptops, desktops and servers using the 22-nm products later next year.

"We are ... open to adding other customers beyond Achronix," said Bill Kircos, an Intel spokesman, via e-mail on Tuesday. He declined to say when the company would start signing up other customers.

Intel advances its manufacturing process every two years, and invests billions to upgrade factories. The company last month said it would invest between US$6 billion to $8 billion over multiple years to build a new plant and improve existing manufacturing plants in the U.S. A part of that investment will be applied to making 22-nm chips, which are faster and more power-efficient than chips made using the current 32-nm process.

The company also announced the opening of a $1 billion chip testing and assembly facility in Vietnam last week.

Making FPGAs for Achronix would make up a tiny amount of overall chip manufacturing capacity, Kircos said. Achronix makes specialized integrated circuits and chips for sectors like networking, communication and high-performance computing.

By accepting a small customer like Achronix, Intel is dipping its toes in the contract manufacturing waters, analysts said. Intel's chip development and manufacturing are tightly linked, and it could be years before Intel is ready to compete with large-scale contract manufacturers such as TSMC (Taiwan Semiconductor Manufacturing Co.), UMC (United Microelectronics Corp.) or GlobalFoundries.

"It's more of a test drive than a real commitment," said Dan Hutcheson, senior analyst at VLSI Research, which focuses on the semiconductor and chip manufacturing industries.

Intel has a good reason to look at FPGAs as they are "an incredibly profitable market," worth $4.7 billion, Hutcheson said.

Intel excels at chip manufacturing and has an advantage over rivals such as TSMC with its manufacturing process, Hutcheson said. Intel may believe it is faster than rivals at advancing process technology, he said.

Higher capital investments are also needed to advance manufacturing processes, said Nathan Brookwood, principal analyst at Insight 64. Intel perhaps realizes that contract manufacturing could fill extra capacity, and offsettin the high fixed cost related to making chips.

"Every generation gets more expensive," Brookwood said. "Looking forward, you could see where you might want to have these third-party customers to help offset some of the fixed expenses."

Brookwood said Intel may also be taking a page from rival Advanced Micro Devices, which last year spun-off its manufacturing operations into a separate entity called GlobalFoundries. AMD explicitly said it spun off Globalfoundries as it couldn't justify enough demand to make investments to scale production, Brookwood said.

"They could see the same sort of phenomenon that Advanced Micro Devices saw half a dozen years ago," Brookwood said.

Intel has mostly been serving itself through its factories, and will have to learn about supporting third parties, Brookwood said. Contract manufacturers have lots of experience supporting third parties, and have basic designs for different Arm, MIPS and PowerPC cores to attract fabless customers.

If Intel is looking at the foundry business model, the company may initially make specialized third-party chips for devices like smartphones and TVs, markets the company is going after aggressively, said Shane Rau, research director at IDC.

These chips could help improve sales of Intel's processors, while using up factory capacity, Rau said.

"The need to fill the fab is ever present," Rau said.

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