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Intel Has Already Won the War 4/9/2012

The semiconductor war is over and has already been won by Intel.

I can only describe as amusing the description of ARM Holdings as a competitor to Intel. ARM is a designer of microprocessor cores that can be bought and used by semiconductor manufacturers and fabless semiconductor companies. Since ARM has no fabrication capability, they can never compete directly with Intel, never. Apparently many of the writers and commentators don’t understand that Qualcomm, Nvidia, TI, and others are dependent not only on ARMH for their microprocessor design, but they are dependent on wafer foundries, such as TSMC, Global Foundries, UMC, and even Samsung to provide the bleeding edge manufacturing technology to make their products a reality. All of these foundry sources, repeat, ALL of them are at least two generations of process technology behind Intel. In the semiconductor business, the last thing you want is to be four years or more behind the leader in manufacturing technology. Being two generations behind means that an application processor of equivalent function from Intel would be ¼ the physical size of a processor from, for example, Qualcomm who receives their wafers form TSMC. The Intel device would also be much higher performance and much lower power, both desirable characteristics for battery operated mobile products.

To understand how bad this really is, a little primer on the unusual semiconductor business model is in order:

Semiconductors, otherwise known as integrated circuits, are manufactured in what is called a “batch process”. The ICs are manufactured on silicon wafers that are, in the case of Intel, 300mm (12”) in diameter. The cost of manufacture of the wafers is a constant. It costs the same amount to make a wafer with 100 ICs on it or to make a wafer with 1000 ICs on it. The more ICs that can be made at the same time on a wafer, the cheaper each IC will be. So, the ongoing miniaturization of ICs is more than just a “fun” technological thing to do, it reduces the cost of ICs and, of course, the price of the equipment that the ICs go into.

An added benefit of the smaller ICs is that the performance goes up and the power requirements decline. Modern microprocessors can have over a billion transistors on them. It is absolutely essential that these chips be made on the most advanced processes available. The history of microelectronics is littered with the corpses of semiconductor companies that fell behind in manufacturing technology.

Today, the cost of leading edge technology semiconductor plant is several billion dollars. The cost is so high that most companies can no longer afford to own a manufacturing plant. This has led to what is confusingly referred to as a “fabless semiconductor company”. These companies design their own products, but essentially time-share a manufacturing plant owned by a semiconductor “foundry” to produce those products. Some names of the foundry companies are TSMC, UMC, Global Foundries and even Samsung is acting as a foundry for certain customers.

Some names of the fabless semiconductor companies are Qualcomm, Nvidia, AMD, Broadcom, Marvel, even TI uses foundries to make their leading edge mobile products.

The products of the fabless semiconductor companies can only be as good as the technology available at the semiconductor foundry companies used to manufacture them.

A word about “process nodes”:

Process nodes are the actual size of the transistors on the ICs. Process nodes are continually reduced in size in order to gain performance and cost advantages. Today the process nodes of interest are 32/28nanometer and 22nanometer. For example a 32nm transistor is 32nm by 32nm in size, or 1024 square nanometers in area. A 22nm transistor is 22nm by 22nm or 484 square nanometers in area. As can be seen, shrinking the edge dimension of the transistor by 1/3 reduces the area of the transistor by more than half. That means that more than twice as many of the same ICs can by produced a 22nm wafer than can be produced on a 32nm wafer. That further means that the cost of the 22nm IC is less than half the cost of a 32nm IC. Of course, the 22nm IC is faster and lower power than the 32nm IC.

Gate-first vs. gate-last issue:

Less well understood by investors or discussed by the commentators is the issue of gate first vs. gate last.
Several years ago a process consortium led by IBM attempted to standardize on the basic process used by foundries to manufacture ICs. Many of the members of the consortium decided on a “gate first” process. The only two major manufacturers who decided to move to a “gate last” process are Intel and TSMC. As it turned out the gate first approach would make it difficult or impossible to advance the process node below 32nm. Changing from gate first to gate last is extremely complex In order for companies like Samsung and Global Foundries to reduce their node to 22nm, they will likely have to convert their existing 32nm gate first process to 32nm gate last process and run it long enough to confirm the integrity of the process and then shrink it to 22nm and below. This process could take as long as four year to accomplish. All this time Intel and TSMC can simply move to the more advanced nodes in much less time than the other companies. Intel is already considered to be two generations ahead of the closest competitor. TSMC, although using gate last processing, has run into serious problems running their 32/28 nm fab. Since the other foundries run gate first processes the TSMC customers’ designs would not be compatible with processes run at Samsung and Global Foundries.

Some discussion in support of the Intel win:

The new Apple iPad is using an update of the Apple designed A5 Application Processor called the A5X. The A5X is still manufactured by Samsung on their 45nm node..(see, now you know what a node is), the update of the chip increased the size to 165 sq mm. In the world of ICs that is a huge and expensive chip. It also increased power consumption to the point that Apple had to increase the size of the battery in the iPad. One would have expected such an important part to be produced on the Samsung 32nm process, if Samsung actually had a 32nm process node in high volume production. Apparently they don’t.

The financial media insists on referring to the “declining” PC market. Gartner predicts a 4.4% growth in the worldwide PC market this year. In top of that unit growth, Intel will receive generally higher prices for their PC chips since the new Ivy Bridge will have a far better graphics processing unit (GPU) integrated onto the CPU. The more powerful GPU will cost AMD and Nvidia a great deal of the discrete GPU business. The value thus added could increase CPU revenue 25% over the next couple of years. “Post PC” is another fanciful term coined by Steve Jobs, rest his soul, but it just ain’t so.

The CEO of Nvidia recently suggested, in public, that Intel give access to its fabs to the fabless semiconductor companies. What makes this a new high water mark in desperation is the past relationship between Nvidia and Intel. In early 2011 Intel and Nvidia settled a lawsuit in which Intel paid Nvidia $1.5 billion. There is no love lost between these two companies.

AMD, in the strangest transaction recently, “sold” their interest in Global Foundries (GF used to be the AMD fab until they had to sell it in order to stay in business). In this context “sold’ is an interesting concept since AMD sent the amount of $425 million to the other owners of GF in order to be released from the commitment to buy their chips from GF! Apparently AMD doesn’t think the GF gate first technology can keep up with Intel. The plan is to have TSMC to build AMD processors! That gives new meaning to the expression, “jumping from the frying pan into the fire”.

As evidence of the fact that TSMC is in no position to support large volume of 28 nm products, the TSMC CEO, Morris Chang, has urged his customers to seek other suppliers so they are not totally dependent on TSMC. In the same article Mr. Chang cautioned that falling behind Intel in manufacturing technology would have consequences that would be “horrible to imagine” [for TSMC and their customers].

TSMC predicts that 28nm will be 10% of their revenue this year. What they don't say is that the 28nm wafers they are able to ship will cost about five times the cost of an average 12” wafer from TSMC. So 28nm will amount to about 2% of the wafer volume of TSMC....and that will be with bad yields. 2% of TSMC’s wafer output is about 80,000 wafers. Total 2012 demand for 28nm and below wafers will be about 1 million wafers. To build the TSMC capacity to one million wafers per year would cost $6-8 billion and take 2-3 years to get up and running. Good luck on getting those new Qualcomm and Nvidia 28nm application processors and AMD CPUs from TSMC.

To sum things up, the gate first decision was a disaster, TSMC screwed up by underinvesting in 28nm capacity and is having yield problems with the capacity that they do have, even AMD doesn’t trust GF, and Samsung can’t build enough 32nm A5X chips to satisfy Apple.

Meanwhile, Intel is in the process of ramping up $40 billion worth of 22nm capacity to serve all of the end customer markets that the fabless semiconductor model will be leaving in the lurch. Intel finds itself in the incredibly fortunate position of basically having no competition on the most advanced process node for at least four years.

There is no way for the foundries to leap frog process nodes in order to catch up with Intel. Even TSMC has to think seriously about spending the money for more 28nm capacity when anything they build will be obsolete before ground is broken on the new plant.

The bottom line is that the ongoing 28/32nm discussion is irrelevant. Intel is moving to 22nm Trigate this year. That is effectively two generations ahead. Next year will see the first shipments of Intel 14nm products. No foundry, including Samsung, will ever catch up with Intel on process technology, therefore the foundries and their customers have already lost the war. How silly to discuss their progress on 32/28nm when Intel is shipping 22nm Trigate products and is a year away from 14nm! It's over, and Intel has won.

What to do?

If you own Qualcomm, Nvidia, TI, TSMC, Broadcom, Marvel, ARMH or any other public fabless semiconductor company that needs leading edge foundry technology, sell all holdings immediately. Put 70% of those funds on Intel shares, 10% on Intel Jan 35 calls for some extra “juice”. Sit on 20% dry powder for Micron. That story is for another day.

As Warren Buffet says, “Diversification is for chickens”.
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