Intel: Own Factories Ensure High Margins, But Foundry Business Has Its Advantages

Intel Would Rather Make Chips for Apple Than for Qualcomm

by Anton Shilov
04/17/2012 | 11:51 PM

Intel Corp. considers its own leading-edge manufacturing facilities as a major advantage for itself as they allow to earn high margins, so in case Intel can fill its fabs with its own products, it would barely pursue contract manufacturing opportunities. Nonetheless, the company does not rule out foundry business prospects and will make some chips for others. Still, Intel is unlikely to build commodity chips, such as Qualcomm's, but would produce SoCs for Apple.

 

"The business model that we have today is one that I am extremely comfortable with and we are working as hard as possible to maintain. [...] As compared to other non-integrated device manufacturers, we get paid twice for our products: we get paid the equivalent of a foundry margin and we get paid the equivalent of an architectural margin and that allows us to generate fairly nice margins. So as long as we can fill up all of the factories we can build with Intel products at those kinds of rewards in terms of the ROI, that makes the most sense for us," said Paul Otellini, chief executive officer of Intel, during quarterly conference call with financial analysts.

Intel established its Intel Custom Foundry division within its technology and manufacturing group about two years ago, but it remains extremely tight-lipped about its ongoing endeavors, future plans, prospects and clients. Being the largest maker of semiconductors in the world, Intel has leading-edge process technologies and invests more than anyone else in research and development (R&D) of new manufacturing processes as well as building new manufacturing facilities. Since it every new technology node costs more than the previous one and the cost of new fabs is growing as well (and with 450mm factories their cost wil get even higher), Intel needs to constantly sell more chips and ensure full utilization of its factories. One of the ways to guarantee maximum utilization of production facilities is to make chips for others.

"Are there opportunities out in time to take advantage of the lead that we're building in areas like foundry? Yes. You havve seen some small announcements to that effect, where we have signed up some companies for some foundry activity over the next several years. I would look at those, and I would ask you to look at those as being learning experiences for us. [...] It is for profit [now]. In terms of where it goes long term, I will leave that point open," said the head of Intel.

According to Intel, its foundry contracts allow it to build the libraries and tools that are useful for the company's own system-on-chip (SoC) business. Naturally, the same capabilities improve Intel's positions on the foundry market. Moreover, in case it needs, eventually it will be able to integrate third-party intellectual property (IP) into its custom chips for special clients. For now, the company would prefer making SoCs for its customers, such as Apple, rather than for makers of commodity chips, such as Qualcomm.

"Anything is theoretically possible. [...] The Apple [foundry contract] win would be a lot more attractive than the Qualcomm win," said Mr. Otellini.