1 Surprising Reason Intel Corporation Wants to Be a Contract Chip Maker

By Ashraf Eassa Markets Fool.com

Microprocessor giant Intel (NASDAQ: INTC) is the world's largest chip company by revenue, and most of that $55 billion-plus in revenue comes from the sale of chips that the company designs and manufactures itself.

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Image source: Intel.

In contrast, most other chipmakers design their own products but rely on third-party contract chip manufacturers to manufacture those designs. Those chipmakers are commonly referred to as "fabless" semiconductor companies. That's because a chip manufacturing plant is referred to as a "fab," which is short for "fabrication plant."

Intel has been working to try to build out a contract chip manufacturing business with the aim of nabbing business from market leader Taiwan Semiconductor Manufacturing Company (NYSE: TSM) as well as Samsung (NASDAQOTH: SSNLF).

The obvious reason for Intel to want to enter this business is simply to find a way to make more money. After all, Intel can't design and build products for every segment of the market, so it makes sense for Intel to try to capitalize on opportunities by manufacturing chip designs for others.

A not-so-obvious reason -- one that Intel manufacturing executive Stacy Smith recently talked about -- is that by configuring itself to be able to handle a wider variety of chip designs from third parties, Intel can help its internal chip design teams to be more effective.

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Let's take a closer look at what Smith had to say at the Credit Suisse 20th Annual Technology, Media & Telecom Conference. Transcript via Seeking Alpha.

Building that foundry capability

Smith conceded that the company's revenue and unit volumes from contract chip customers are quite small today. However, he stressed that having the capability to service those customers has "a lot of option value to [Intel] as a company. ... But I don't want to minimize that the capability to flip it around and show that foundry face to our internal [system-on-a-chip] organization is absolutely key," Smith said.

He added that he and Intel Client and Internet of Things President Murthy Renduchintala want to make sure that Intel's own system-on-a-chip teams can "land a product very quickly and take advantage of our Moore's Law benefit."

A really important capability

One of the big strengths of the contract chip manufacturers is that their manufacturing processes, design tools, and intellectual-property libraries are all designed to allow chip designers to quickly put together a diverse range of system-on-a-chip products.

That makes a lot of sense, given that, historically, those contract-chip makers have been required to service a lot of different customers with a wide-ranging set of requirements. TSMC, for example, builds everything from Wi-Fi chips all the way to high-performance graphics processors.

Intel, on the other hand, has built its business primarily around high-performance microprocessors targeted at the personal-computer and server markets designed by in-house teams.

As Intel tries to push into new areas, and as its core markets require an increasingly diverse set of products, the company needs to make sure that its internal design teams aren't hamstrung by the very manufacturing technology that Intel management cites as a key strength.

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Ashraf Eassa owns shares of Intel. 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.