Why Intel’s News Of Outsourcing Chip Manufacturing Sent Shockwaves Through The Semiconductor Industry


Recently during the Q2 Earning’s Call, the leadership at Intel announced second-quarter revenue of $19.7 billion, which was up 20 per cent year-over-year. In this, data-centric revenue grew 34 per cent, accounting for 52 per cent of total revenue. “It was an excellent quarter, well above our expectations on the continued strong demand for computing performance to support cloud-delivered services, a work- and learn-at-home environment, and the build-out of 5G networks,” stated Bob Swan, Intel CEO.

But another big highlight from the earning’s call was the statement from Intel’s CEO that the company is behind schedule on developing its next-generation manufacturing process. What this means is that Intel may be coping hard to keep up with the latest 7-nanometer manufacturing process.

“I’m not pleased with our seven-nanometer process performance. But as we sit here today, six months through the year, our people are safe. We’re delivering for our customers,” the CEO said. 

Now, the 7nm-based CPU product timing is getting delayed approximately six months compared to previous expectations. The main driver is the yield of Intel’s 7nm process, which, according to Intel, is now trending around twelve months behind the company’s internal target. On the other hand, the company is ramping up 10-nanometer products this year with growing volumes and strong demand for an expanding line-up. This includes an expanding portfolio of 10nm-based Intel Core processors with Tiger Lake rolling out soon, and the first 10nm-based server CPU Ice Lake, which continues to be planned for the end of 2020.

Intel’s CEO also said that as the process node for 7 nm slipped, the company is evaluating other opportunities, and is engaging deeper with its ecosystem partners. One of the things that Intel has considered is leveraging third-party foundries even more than it ever has in the past, and outsource Fab capabilities instead of using its own. 

“Over the last couple of years, we have been talking about, as we expand our capacity, evaluating more holistically when do we use third-party foundries rather than doing everything ourselves. And we call that engaging in the ecosystem in much more holistic means for a variety of distinct reasons, so we do not have to create everything ourselves as the capital-related with each node comes to be a bit higher,” stated Bob Swan.

CEO Swan told investors in November that Intel was set to start catching up to rivals with its 7-nanometer process in early 2021, but was forced to reverse himself because of the delays. But everyone was anticipating Intel’s 7-nanometer chips as its competitor — AMD is already offering processors of the same dimension. But, as per the announcement from CEO of Intel, Bob Swan, the production of the chip would be held by another year. 

Analysts and investors don’t seem happy about Intel’s announcement of outsourcing manufacturing of chips. Investors took the news negatively and caused a sharp drop in the share price despite a great quarter. Analysts have also been comparing the production lags with Intel’s rival AMD, which has a partnership with Taiwan Semiconductor Manufacturing Co (TSMC), the world’s leading chip manufacturing company. While Intel witnessed a major drop in its, the opposite happened with AMD who stock prices increased in an inverse relation. 

Why This Matters

The company has been the biggest chipmaker for over 30 years by incorporating cutting-edge manufacturing processes. The move is not only significant from the technology and business standpoint but also concerns trade and geopolitics. 

Intel has done a large share of its R&D in the US and has important Fab manufacturing centres in Oregon and Arizona, where the company has manufactured its chips and shipped it to the rest of the world.

From the American perspective, the stated outsourcing plans can have an impact on Oregon and Arizona, the US states where Intel has its Fab units. Especially in Oregon, Intel is the largest private employer, with 20,000 workers in Washington County, and contributes enormously to the local economy, including billions of dollars worth investment over the years.

In fact, media reports stated that Intel is working with TSMC for next year even though it has not been confirmed yet. Here TSMC is a major company that Intel can collaborate to give itself the leverage of advanced chip manufacturing, and putting its focus on designing newer, more innovative chip architectures and products. It is to be noted that TSMC is reportedly manufacturing chips utilising chip design similar to Intel’s 7 nm. Intel’s competitor AMD has already outsourced its chips to TSMC, which, according to analysts, might give the latter advantage for now, and help deliver more powerful processors.

Will This Be The End Of American Chip Manufacturing?

Intel has been a leader of computing hardware for decades with leadership products, and has produced its own chips since it was founded in 1968. With the last five years, the company has faced challenges in manufacturing shrinking hardware, and its latest challenge comes after years of delay to Intel’s present generation of 10-nanometer chips as the chip giant worked to beat its high rates of defects.

“We look at the roadmap missteps to be a failure for an organisation once known for flawless execution, and could well signify the end of Intel’s computing dominance,” Chris Caso, an analyst at Raymond James told.

Domestic chip production coupled with AI innovation has become an issue of national advantage for countries, and some U.S. politicians in the past even cautioned that carrying chip design knowledge overseas could be a potentially dangerous blunder for US national security, and even proposed funding and tax cuts for boosting domestic manufacturing of chips. 

In the past, there was news about the Trump government working on setting on new chip manufacturing in the US and moving away from the dependence on Asian nations. According to media reports, white house officials had been engaging in talks with Intel and TSMC about setting up semiconductor foundries in America.

Chip manufacturing has been at the centre of trade wars, global geopolitics and even national security priorities. With Intel’s plans on shifting chip manufacturing overseas, this has been a setback to the earlier talks of boosting domestic manufacturing.

But the cost of running Fab units is so high that the economics of scale for US companies do not really support more than a few leading-edge Fabs. On the other hand, chip manufacturing is a special category when it comes to technological prowess, and Intel has the only US-based fabrication that is competitive with the state of the art capabilities. 

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Vishal Chawla
Vishal Chawla is a senior tech journalist at Analytics India Magazine and writes about AI, data analytics, cybersecurity, cloud computing, and blockchain. Vishal also hosts AIM's video podcast called Simulated Reality- featuring tech leaders, AI experts, and innovative startups of India.

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