Last weekend, U.S. based semiconductor design and manufacturer Intel rocked financial markets with an indication that the company might consider exiting chip fabrication and production and instead outsource such activities to existing contract fab providers. The announcement was made to industry analysts by Intel’s chief executive Bob Swan.

By some accounts, such an announcement calls into question whether the United States can maintain a future in domestically sourced semiconductor design and manufacturing led by domestic companies.

Indeed, semiconductor supply networks are being perceived as essential in strategic industry and economic growth including areas of advanced networks, artificial intelligence, alternative energy, autonomous driving, data science and national defense needs. The reality, however, is that leading edge technical development comes with a very high capital expense, and fabricators are unlikely to invest billions without some assurance of likely product demand and price advantage. New fabrication facilities take years to construct, have a finite technology lifecycle and there needs to be a highly skilled design engineering  and fabrication workforce to staff and operate such facilities.



In mid-May, Supply Chain Matters published two separate blogs that called attention to rapidly changing developments focused on U.S. semiconductor supply network presence. In our initial blog, we called attention to an exclusive report published by The Wall Street Journal that cited correspondence and people familiar with discussions, and indicated that Trump Administration officials  were in talks with both Intel and Taiwan based global semiconductor manufacturing leader TSMC to build new semiconductor fabs within the United States.

Three days after we published our blog indicating accelerated industry developments, TSMC formally announced the company’s intention to build and operate an advanced semiconductor fab in the United States with the mutual understanding and commitment from the U.S. federal government and the State of Arizona. According to the TSMC announcement, the facility would utilize TSMC’s 5-nanometer technology for semiconductor wafer fabrication and have a 20,000-semiconductor wafer per month capacity while creating over 1,600 high-tech professional jobs. The chip fabricator has already introduced 5-nanometer capabilities at its much larger fab facility in Taiwan with a planned capacity volume of 100,000 wafers per month.

In our blog we raised the question of how committed respective governments and their legislators will be in stimulus measures directed related to semiconductor manufacturing, given the overall cost, and the conflicting demands for other industry stimulus needs. The other obvious question and debate is whether governments should be funding R&D efforts of private industry, without garnering the financial benefits of such investments. There are differences of government’s role across countries and political structures.

Semiconductor manufacturing

What Does Intel’s Outsourcing Hint Imply?

There are obviously a number if viewpoints as to what is behind Intel’s threat to outsource manufacturing outside of the United States. CEO Swan’s announcement came two days after the U.S. House of Representatives had passed an amendment to the National Defense Authorization Act that called for federal subsidies for semiconductor manufacturing.

Industry media have pointed out that Intel has just rolled out 10-nanometer production capability, but ongoing efforts to produce 7-nanometer chips have incurred a one to year delay.  By that time, TSMC and Samsung would have already been producing 5-nanometer chips. Another obvious consideration is the high capital investment required in the ability to produce the latest generation of chip fabrication. TSMC reportedly invested upwards of $20 billion in its current fab production facilities. With such levels of capital investment, there needs to be solid assurances of market demand.

Some may question whether Intel has lost its design engineering innovation skills. Others have opined that Intel might have lost the confidence of major high-tech product producers such as Apple and various personal computer and server manufacturers, all of which are key to future investment decisions.  Apple recently announced that it will henceforth in-house design its needed semiconductor chips and only rely on contract chip fabricators for unit-volume needs.

More profound is the Asia perspective, best expressed by a report published by the Asia Times: “Semiconductors are the building blocks of the digital economy, and America’s inability to slow the decline of onshore chip fabrication is a strategic liability of the highest order.”


Supply Chain Matters Perspectives

From our lens, this might also be about Intel playing hardball with U.S. lawmakers, in-essence playing out the options of receiving direct government stimulus to accelerate existing chip design and fab efforts, with outsourcing being the hammer of political pressure. That stated, Intel also has to weigh the financial realities of having to sink more money into development only to be at an industry dis-advantage.

Intel’s hints maybe not be just hints but rather an acceptance of market and political environment realities.

It seems likely that Taiwan and South Korea based semiconductor-based manufacturers will remain the key providers of the latest semiconductor fabrication technologies, and that may well be the source of increased geo-political tensions for many months to come. TSMC’s move to establish a presence in the U.S. can thus be viewed as a strategic move of supply network risk mitigation.

For high-tech and electronics and other industry product providers who rely on advanced semiconductor chips for innovative products, the accelerating dynamics surrounding the industry require careful monitoring and assessment. This is especially in the light of increased political and trade tensions among the United States and China. As we have noted, the latter is moving full force in developing advanced generation domestic semiconductor design and fabrication capabilities.


Bob Ferrari

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