Why Intel Corp. May Eventually Go Fab-less

By Markets Fool.com

A good friend of mine recently argued to me that Intel , which often boasts about its chip manufacturing capabilities, could very well eventually go fabless. At the time, I argued that Intel seems very committed to its chip manufacturing technology and the investments in both technology and factory capacity that it's making there.

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Indeed, Intel CEO Brian Krzanich recently published a post on the company's website in which he makes the following statement with respect to chip manufacturing technology:

As we progress from 14 nanometer technology to 10 nanometer and plan for 7 nanometer and 5 nanometer and even beyond, our plans are proof that Moore's Law is alive and well. Intel's industry leadership of Moore's Law remains intact, and you will see continued investment in capacity and R&D to ensure so.

In light of this statement, and the countless other statements that Intel executives have made over the years, it may seem insane to suggest that Intel would abandon its chip manufacturing technology and go fab-less.

Here's why it might not be.

Where's the volume growth going to come from?
The key thing that's required to justify investments in chip manufacturing technology is scale. The reason that so many companies don't own their own plants is that they simply don't bring in enough revenue, nor do they drive enough volume, to justify the multibillion-dollar investments required to build a chip manufacturing plant.

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On top of that, developing the process "recipes" to actually manufacture the chips is very expensive. Intel doesn't break out the research and development spending that it dedicates to this, but rival TSMC spends over 2 billion per year to support its research and development pipeline. I would imagine Intel's spend there is at least as great.

The problem that Intel faces is that, unlike TSMC, which has tremendous wafer/unit scale and a viable path to continued robust unit growth thanks to its exposure to smartphones, it's not clear that it will see much unit growth in the years ahead.

Intel should see growth in server/data center chips as well as in its Internet of Things segment, but it is likely that it will continue to see unit declines in the personal computer market. Additionally, with Intel having essentially exited the market for smartphone applications processors, a large unit volume opportunity for the company is now closed.

There's also the matter of eroding technology leadership
Historically, Intel has had clear technology leadership vis-a-vis its foundry competitors. However, as a result of the company's stumbles with its latest 14-nanometer technology and the delays it saw with its 10-nanometer technology, it's not at all clear that this "leadership" will continue.

In fact, as Intel struggles and lengthens the time in between new chip manufacturing technology introductions, TSMC seems to be quickening the pace at which it deploys new technology (no doubt driven by very demanding customers such as Apple ).

At this rate, Intel may eventually find that there is no really differentiation associated with using its own manufacturing technology relative to TSMC's. Or, perhaps in a "doomsday" scenario, Intel might find that foundry technology has become better than its own.

In that case, it's not clear that it would make sense for Intel to continue soldiering on with its own manufacturing technology.

When might this happen?
I don't think this is the sort of thing that Intel would announce out of the blue; it would need to be triggered by real, negative business realities. Whether that reality winds up being consistent overbuilding of capacity in anticipation of PC demand that doesn't materialize (leading to margin-killing excess capacity charges) or competitive issues in core markets relative to foundry-build chips is not clear.

If Intel ultimately does decide to go fab-less, it probably won't be anytime soon.

The article Why Intel Corp. May Eventually Go Fab-less originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.