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In 2015, history was made in the semiconductor world: IBM sold all its microchip production sites to US company GlobalFoundries. It was the end of an era. Created in 1911, Big Blue was an iconic player in the industry. But after being shaken up by newcomers, the venerable US company had to change its strategy, selling off a struggling business that recorded a $700 million loss in 2013.
However, IBM hasn’t left semiconductors completely behind. The giant continues to develop its own chips, particularly its Power processors that are used in its high-performance servers and supercomputers. But it no longer produces them. That task is now delegated to GlobalFoundries. By abandoning its production facilities to focus on research and development, Big Blue is simply adopting a method that has become the norm in the semiconductor industry: the fabless (no factory) model, which has been successful for other companies such as Apple, Qualcomm and Nvidia.
"Most companies around the world known for their microchips, with the notable exception of Intel, are fabless," points out Frédéric Yoboué, a semiconductor analyst at Bryan, Garnier & Co. “These companies delegate production to foundries and concentrate on the design and architecture of the chips themselves. This separation of tasks is due to the exorbitant cost of production factories for microchips. In addition, given the recurrence of investments, enormous volumes are needed to make them profitable.” For example, the Taiwanese foundry TSMC, which alone produces more than half of all chips in the world, spent $17 billion on its latest production facility.
Free from these gigantic investments, chip designers can concentrate solely on research and development, while simultaneously benefiting from the best production technologies. AMD is an excellent example of this strategy. In the early 2010s, the US graphics card specialist was struggling after several years in the red. AMD decided to sell off its production facilities, which would become GlobalFoundries, and go fabless. Since then, AMD has been winning market share in the domain of PC and server microprocessors, thanks to TSMC’s production technologies, which are considered the best in the world.
"ARM is one of the best companies I know of"
Julien Leegenhoek, tech stock analyst at Union Bancaire Privée (UBP)
At the same time, its main competitor in this industry, Intel, which produces all its chips internally, is struggling to overcome challenges at its production facilities. While TSMC will launch mass production of 5 nm chips in April 2020, Intel will only be able to produce its first 7 nm products in 2021. At a conference in March, George Davis, CFO of Intel, admitted that his company was two years behind the competition.
Another advantage of the fabless model is that new players – i.e. start-ups that don’t have the funds to build factories – can emerge and disrupt the semiconductor market. UK start-up ARM did exactly that. “ARM is one of the best companies I know of,” said Julien Leegenhoek, tech stock analyst at Union Bancaire Privée (UBP). “In just a few years, it has become the R&D office for the entire semiconductor industry.” ARM was founded in Cambridge in 1983 when the UK manufacturer Acorn was designing ARM1, a simple, inexpensive processor for computers designed to be used in British schools.
Since the company was unable to finance factories, it sold the result of its R&D under licence. In the 1990s, the ARM architecture was particularly interesting to Texas Instruments, which at the time was designing chips for Nokia mobile phones. This partnership was the start of something good.
In the years that followed, the UK company filed many patents and claimed intellectual property on all processors designed for the telephone market. Its strength lies in the way it designs chips, which makes them less expensive and less energy-hungry. The competition, however, which is led by Intel, is still focused exclusively on power. In practice, ARM clients, which now include Apple, Samsung, Huawei and Qualcomm, pay for the rights to use ARM architectures. These companies pay ARM anywhere from $200,000 to tens of millions of dollars (based on various criteria such as licence duration or exclusivity clauses), as well as royalties on each chip sold. The architecture is then “customisable” at will by the purchasers, that can apply their own innovations, such as the A13 chip – designed by Apple on ARM architecture – which is used in the iPhone 11.
“More than 80% of smartphones sold worldwide currently run on ARM architecture,” said Leegenhoek. This piqued the interest of Softbank, which acquired the company in 2016 for $31 billion. Since the acquisition, ARM is trying to diversify by developing chips for connected devices as well as artificial intelligence servers. And it’s doing it all without factories.