Is Intel Trying to Offload Low-End Unprofitable Product Manufacturing?

On March 2, Intel (Nasdaq:INTC) and Taiwan Semiconductor Manufacturing Corp. (TSM) announced they had reached an agreement to collaborate on technology platform, IP infrastructure, and SoC Solutions for the Atom CPU cores. According to Intel’s release,

“The collaboration is intended to expand Intel’s Atom SoCs availability for Intel customers for a wider range of applications through integration with TSMC’s diverse IP infrastructure.”

On January 8, 2009, The Information Network wrote an article in Seeking Alpha that asked “Did Intel Misjudge Success of the Netbook Asks The Information Network” suggesting that the $1 billion loss by Intel reported in the previous quarter was due to manufacturing of 5 million low-end Atom processors – a loss in revenue of $200 per CPU – instead of the more profitable Penryn Core 2 processor used in notebooks.

We need to weed through the rhetoric and hyperbole to ascertain why, during the depths of the worst downturn in semiconductor history, Intel would forgo the opportunity of utilizing some of the capacity at their expensive 300mm fabs dotting the worldwide landscape to manufacture processors for netbooks that The Information Network forecasts will reach 21.5 million units sold in 2009, a growth of 189%. Our Seeking Alpha article of January 8 suggested that Intel stands to lose another $2.16 billion in 2009 on the Atom processor.

The strategy begs the question, why would Intel, which has been in the system on a chip (SoC) and embedded markets for a long time, need TSMC? Intel refers to TSMC’s “technology platform” which to us implies manufacturing. This leads to another question.. Are Intel’s manufacturing costs so high that they lose money on manufacturing a $29 chip and that is the only reason they signed this agreement with TSMC?

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Comments

[malach hamo...:]

wouldn't you?

Mar 04 05:27 AM

[HereAndNow:]

Perhaps Intel is trying to establish an ecosystem for the x86 Atom comparable to ARM.

Mar 04 06:16 AM

[ChrisC62:]

Could be two reasons here:
1) As HereAndNow stated - Intel is selling an embedded CPU which customers can combine with IP blocks from any other vendors, to provide some competitive advantage against the system builders competitors, much as the service ARM provides now.
2) Intel desperately needs a 10x drop in power from current Atom to be competitive with ARM for the massive cellphone market. Intel has developed its process technology for relatively power hungry desktop and laptop chips. It is possible TSMC already provides an ultra low power transistor and process technology which will enable Intel to meet the power specs.

Mar 04 08:32 AM

[Intelvet:]

creating new markets is what they do. The Penryn core is too expensive to go into cell phones and netbooks. Intel's strength is manufacturing and second generation ATOM will be profitable and not cannibalize the notebook market.

Mar 04 08:36 AM

[Smart1:]

I am fairly certain this has nothing to do with actually producing Atom processors or low cost manufacturing or anything like that.

It is all about enabling customers to buy custom chips with an Atom core. I believe they are addressing the power in coming generations of Atom processors. I doubt the TSMC process will yield significantly lower power parts on its own.

In summary, TSMC is not going to make standalone Atom processors. They are going to be making custom parts with an Atom core for probably lots of companies making small form factor, low power computing devices.

Mar 04 11:15 AM