Intel Corporation Talks Contract Chip Manufacturing Ambitions

By Ashraf Eassa Markets Fool.com

Several years ago, then-newly installed Intel (NASDAQ: INTC) CEO Brian Krzanich indicated that the company would be much more open to allowing others to build chips on its manufacturing technology than it had been in the past.

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Since then, Intel has announced a couple of contract chip manufacturing deals with companies like Altera (which Intel ultimately bought), LG, Spreadtrum, and others, but so far these have not yet translated into any significant revenue for the company.

Image source: Intel.

Intel also didn't highlight contract chip manufacturing as part of its total addressable market during its Feb. 9 Investor Meeting presentation.

That said, one investor did ask the company's executives about its contract chip manufacturing, or foundry, strategy. Here's what Intel executive Murthy Renduchintala had to say about the topic.

Not aiming to be a general-purpose foundry

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"Our approach is very strategically specific," Renduchintala began. "We're certainly not positioning our foundry ambitions to be a general-purpose merchant foundry."

Renduchintala then went on to say that the company is more interested in pursuing "complementary sets of benefits between our partnerships."

As an example, he pointed out that the company's relationship with programmable logic specialist Altera began as a contract-chip manufacturing relationship but ended with Intel scooping Altera up for $16.7 billion in a high-profile deal completed in late 2015.

Renduchintala then highlighted some other areas that could be beneficial in a way like how Altera was, such as "low-power, high-performance silicon."

"We've announced some partnerships there that really help us in that area," he said, likely referring to the deals with LG and Spreadtrum to manufacture high-end mobile processors.

"I think we're really looking at how we can strategically partner to improve the depth and breadth of our [intellectual property] portfolio," Renduchintala continued.

In other words, investors might not want to expect contract-chip manufacturing to be a significant part of Intel's revenue going forward. However, the deals that Intel does make could potentially strengthen the company's efforts in its core growth businesses, leading to indirect revenue growth.

When will the revenue start coming in?

At this point, I think investors should watch for products from the agreements that have been made public to begin to hit the marketplace and deliver some amount of revenue for the chipmaker.

Perhaps most interesting of the ones that should begin to ramp up soon is the deal with Spreadtrum. You may recall that back in 2015, Spreadtrum announced that it would be building some of its next-generation products using Intel's 14-nanometer technology and that those products were supposed to launch in 2016.

Those chips didn't launch last year, but there was an article from DigiTimes published in early October claiming that sample shipments of these chips would begin that month and that Spreadtrum was looking to "grab orders for Samsung's mid-range smartphone series in 2017."

Perhaps at the Mobile World Congress trade event, which is expected to start on Feb. 27, Spreadtrum will formally announce these chips and/or some smartphone vendors will announce that they are planning to use those chips.

There are some other deals that Intel announced, including ones with Microsemiand Panasonic, that could also start to generate revenue within the next year or two, but it's hard to gauge the potential importance of those deals from a revenue perspective for Intel.

For now, investors ought not to get too excited about the company's contract chip manufacturing plans, but they should keep an eye out for any interesting developments.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.