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Intel under pressure to ramp up outsourcing to Asian chipmakers

US has been in talks with TSMC to produce flagship chip products for first time ever

U.S. chipmaking giant Intel is in talks with TSMC to sharply expand their outsourcing arrangement. (Source photos by Shinya Sawai and Kaisuke Ota)

TAIPEI -- Asia’s biggest chipmakers hope Intel on Thursday will confirm long-standing talks to give them a bigger role in making its flagship chip products, as the U.S. semiconductor titan struggles to keep pace with the cutting-edge offerings of its rivals.

America's biggest manufacturer of microprocessors has been in intense talks for at least five projects with Taiwan Semiconductor Manufacturing Co. with a view to outsourcing production of some of its flagship processors for a wide range of devices, including laptops, servers and edge-computing devices, to the world’s biggest contract chipmaker, Nikkei Asia has learned. 

Such chips would hit the market as early as 2022 and start to be produced in significant volumes in 2023, people familiar with the matter told Nikkei.

Intel, which will announce its fourth quarter earnings on Thursday, is already a longtime customer of TSMC, having outsourced production of some graphics processors, modems, AI accelerators and other peripheral chips to the Taiwanese contract chipmaker. However, if the two companies reach a deal for these five projects, it would be the first time that Intel decided to outsource such a wide range of key processor products.

Intel has also been in talks with another Asian chipmaker, Samsung Electronics, for chip production, Bloomberg first reported. However, the scale of production that Intel plans to outsource to Samsung is smaller than its activities with TSMC, Nikkei learned. 

Until now, Intel has designed and manufactured the bulk of its most important products in-house, a strategy that helped it dominate U.S. chipmaking for nearly 50 years.

But delays in rolling out its own latest chip production technologies, as well as the rise of Asian chipmaking giants like TSMC and Samsung, have eroded Intel's market share in recent years.

Intel’s outgoing CEO, Bob Swan, said in an earnings call last July that the company needed a "contingency plan" to outsource some of its chip production after the company was forced to push back its schedule for 7-nanometer chip production until at least late 2022. In December, Swan said his company was considering a "fundamental transformation" of its long-term business model of designing, developing, producing and selling chips entirely on its own. 

However Intel said on Jan. 13 that Swan will step down as CEO next month after a year and a half in the role, including six months in an interim capacity. Swan will be replaced by industry veteran and former Intel CTO Pat Gelsinger. It remains to be seen how the change of leadership will affect the company's corporate strategy.

Nanometer size refers to the linewidth between transistors on a chip -- the smaller the number, the more transistors can be squeezed onto a single chip. This improves performance but also makes development and production much more challenging.

Intel and TSMC have been discussing plans to use TSMC's 5-nanometer chip production technology -- currently the most advanced in the industry and the same tech used to produce mobile processors for the iPhone 12 -- as well as the even more advanced 3-nanometer production technology that TSMC is still developing, the sources said. Intel is also considering using 6-nanometer process technology, an enhanced version of 7-nanometer tech that AMD is already using for its laptop and server processors this year, the people said.

In addition to processors -- including the Atom and Xeon series -- for various electronic devices, the outsourcing projects under discussion also cover more graphics processors and other peripheral chips, two people with knowledge of the discussions said.

A closer relationship with Intel would further lift earnings at TSMC, which revealed strong fourth quarter results on Dec. 14. thanks to surging chip demand in 2020. Mark Li, a veteran semiconductor analyst with Sanford C. Bernstein said doing more business with Intel could boost TSMC's revenue by as much as 8% by 2023. TSMC increased its capital spending for 2021 to between $25 billion and $28 billion, significantly higher than the $17.2 billion budget for last year and a record high for the company.   

Intel hopes that outsourcing will allow it to take advantage of the industry's most advanced chip production technology and defend its dominant market position while it works to get its own development schedule back on track. AMD has already doubled its share in the market for PC processors -- including desktops, notebooks and work stations -- from 10% in 2018 to around 20% in 2020, according to research agency IDC. Intel's share dropped to about 80% from nearly 90% during the same period.

Apple, once a key Intel customer, started using its in-house chips for Macs last year, another factor that dragged down the U.S. chip giant's market share. Intel's share of the market for notebook processors could plunge to 68.6% this year, research agency TrendForce forecast, from 78.5% in 2020.

Both AMD and Apple design their own chips but outsource production to manufacturing specialist TSMC. Like the latest iPhone 12 processors, Apple's Mac processors are produced with TSMC's 5-nanometer process tech. AMD's latest laptop processors unveiled at CES 2021 -- dubbed the Ryzen 5000 series -- use TSMC's 7-nanometer process tech.

Intel on Jan. 11 announced four new processor families at CES. Covering commercial, gaming, mobile and education applications, these processors will be powered by its in-house 10-nanometer chip production technology, which went into use early last year. Its first server processor produced using this tech, the Xeon Scalable processor -- code-named Ice Lake -- has finally entered production and will ship this quarter, according to the company. Some market watchers say Intel's 10-nanometer production process can generate performance similar to TSMC's 7-nanometer chips, which first entered mass production in 2018.

Intel will be able to take back production from TSMC and Samsung if its own manufacturing technology catches up, Bernstein's Li said. "There are also questions whether Taiwan, as a small island, can support such a massive addition of chip manufacturing capacity," Li added, pointing to limited resources, such as land and electricity.

Intel declined to comment for this article, while TSMC said it does not comment on individual customers.

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