Innovation and competition in global semiconductor fabrication

For a half-century after the invention of the integrated circuit at Texas Instruments (TI) and Fairchild Semiconductor in the late 1950s, the United States was a leader in global semiconductor fabrication. Until 1991, TI and Motorola were the world’s leading integrated device manufacturers (IDMs), selling chips they fabricated, at which point they were surpassed by Intel, with its microprocessor having become the standard hardware in personal computers.[1]

Meanwhile, from the early 1980s, “fabless” semiconductor companies – firms that designed, but did not fabricate chips themselves – proliferated, creating products for varied segments of the memory and logic markets. Initially, these design companies turned to IDMs for wafer fabrication. Responding to the opportunity to manufacture chips for fabless firms, in 1987 Morris Chang, a Taiwanese native with electrical engineering degrees from MIT and Stanford and 25 years of work experience at TI, launched Taiwan Semiconductor Manufacturing Corporation (TSMC) as the world’s first “pure play” foundry. In 1985, the Taiwanese government had lured Chang back home to head its Industrial Technology Research Institute (ITRI), from which TSMC was spun off with financial backing from a state development fund and the Dutch electronics company Philips.

In 1980, ITRI had created United Microelectronics Corporation (UMC) as Taiwan’s first IDM. In 1995 UMC divested its chip-design business as MediaTek and became a pure-play foundry.[2] In 2020, TSMC’s revenues were $46.9b., 7.4 times UMC’s. Close in sales to UMC was GlobalFoundries (GF), a 2009 spin-off from U.S.-based Advanced Micro Devices (AMD). GF subsequently acquired fabs of Chartered Semiconductor (Singapore) and IBM. Now wholly owned by an Abu Dhabi sovereign wealth fund, GF’s global headquarters are in New York State. In fourth place among the dedicated foundries is China-based Semiconductor Manufacturing International Corporation (SMIC), with 2020 revenues of $3.8b.[3]

Larger, however, than UMC, GF, and SMIC as a semiconductor fabricator is Samsung Electronics Corporation (SEC), the flagship company of the Korean Samsung chaebol, with estimated 2020 foundry revenues of $14.7b., more than twice those of UMC and GF. In 2020, SEC generated $200.6b. in total revenues across all product segments, of which semiconductors contributed $121.0b. Besides the $14.7b. in foundry revenues, SEC’s fab output consisted of $59.3b. in chips used in SEC products such as smartphones and computers as well as $47.0b. in SEC-designed chips sold externally. As an IDM, SEC was second globally to Intel, which had $77.9b. in 2020 semiconductor revenues. Among the fabless firms competing with Intel at the high end of the processor market are U.S.-based Nvidia (2020 revenues: $16.7b.) and AMD ($9.8b.).

The most advanced chips are produced for smartphones as “system-on-a-chip” (SOC). The leading designers of SOCs are Apple (USA), Qualcomm (USA), SEC (South Korea), and MediaTek (Taiwan). HiSilicon, a wholly-owned subsidiary of Huawei Technologies (China), was also a SOC leader until U.S. trade sanctions, implemented from August 2020, terminated its access to TSMC’s fab output.[4] TSMC and SEC use 7nm and 5nm process technology to manufacture many of these mobile processors along with the most advanced AMD computer and Nvidia gaming SOCs. According to TSMC, compared with 7nm, 5nm offers 15% faster speed, 30% less power consumption, and 1.8 times the logic density.[5]

TSMC’s most important advanced-fabrication customer is Apple, accounting for 22% of net revenues in 2018, 23% in 2019, and 25% in 2020.[6] From the iPhone’s launch in 2007, Apple relied on SEC for chip fabrication, for which the Korean company built a state-of-the-art plant in Texas. But SEC subsequently emerged as Apple’s leading competitor in smartphones. In early 2011, Apple filed a smartphone-patent infringement suit against SEC. As an alternative to SEC, Apple contracted with TSMC for foundry services but needed more than five years to shift iPhone chip fabrication entirely from SEC to TSMC.

With its Apple contract, TSMC now leads the race in advanced process technology, with SEC close behind. In 2020, both TSMC and SEC transitioned from 7nm to 5nm process, and in 2021 both are making investments to commercialize 3nm. TSMC went from zero 5nm revenues in 2Q20 to 8% in Q320 and 20% in Q420.[7] SEC is intent on closing the technology gap with TSMC by allocating $28b. to capital expenditures in 2021, about the level of its 2020 plant and equipment (P&E) investments.

For its part, TSMC has announced plans to spend $100b. in total on P&E and R&D over the next three years, including $30b. in 2021, up from $17.2b. in 2020. TSMC will construct a $12b. 5nm facility in Arizona and is also considering the state as the site for a $25b. 3nm fab.[8] Most of this new capacity is slated to fabricate Apple’s M-series processors.[9]

Intel still leads the global semiconductor industry in total revenues. But, as an IDM, Intel manufactures almost all its CPUs at 14nm, and its 10nm capacity has been stuck, with limited output, since 2018.[10] Meanwhile, Apple is abandoning Intel processors for its Mac computers, turning instead to TSMC to fabricate Apple’s own designs.[11] Intel itself already contracts with TSMC and UMC to produce 15-20% of its non-CPU chips. Moreover, later this year, TSMC will commence production of intel’s Core i3 processors, inside advanced laptops, at 5nm.[12]

Even as it has fallen behind in advanced chip fabrication, Intel has remained a very profitable company, averaging $21.0b. in annual net income in 2018-2020, with average annual P&E expenditures of $15.2b. In 2021, Intel expects to produce its first 7nm CPU, while increasing P&E spending to $20b.

As part of its IDM 2.0 strategy for manufacturing, innovation, and product leadership, announced in March by the company’s new CEO, Pat Gelsinger, Intel plans to build two fabs in Arizona.[13] Included in IDM 2.0 is the launch of Intel Foundry Services “with plans to become a major provider of foundry capacity in the U.S. and Europe to serve customers globally.”[14] Yet even if Intel should achieve 7nm on a significant scale in 2021, it will fall further behind TSMC and SEC as this decade unfolds. At some point, Intel could even find itself trailing SMIC, especially if China responds to U.S. trade restrictions by developing a semiconductor equipment supply chain that is not dependent on U.S. vendors.[15]

Intel’s external and internal competitors

Why has Intel fallen behind TSMC and SEC in semiconductor fabrication, and why is it unlikely to catch up? The problem is that Intel is engaged in two types of competition, one with companies like TSMC and SEC in cutting-edge fabrication technology and the other within Intel itself between innovation and financialization. The Asian companies have governance structures that vaccinate them from an economic virus known as “maximizing shareholder value” (MSV).[16] Intel caught the virus over two decades ago. As we shall see, with the sudden appointment of Gelsinger as CEO this past winter, Intel sent out a weak signal that it recognizes that it has the disease.

In the years 2011-2015, Intel was in the running, along with TSMC and SEC, to be the fabricator of the iPhone, iPad, and iPod chips that Apple designed. While Intel spent $50b. on P&E and $53b. on R&D over those five years, it also lavished shareholders with $36b. in stock buybacks and $22b. in cash dividends, which together absorbed 102% of Intel’s net income (see Table 1). From 2016 through 2020, Intel spent $67b. on P&E and $66b. on R&D, but also distributed almost $27b. as dividends and another $45b. as buybacks. Intel’s ample dividends have provided an income yield to shareholders for, as the name says, holding Intel shares. In contrast, the funds spent on buybacks have rewarded sharesellers, including senior Intel executives with their stock-based pay, for executing well-timed sales of their Intel shares to realize gains from buyback-manipulated stock prices.

As Table 2 shows, Intel’s distributions to shareholders have been far greater than those made by either SEC or TSMC.

The purpose of SEC’s stock buybacks in 2002-2007 and 2014-2018 was to increase the voting power of the founding Lee family, thereby consolidating its strategic control over resource allocation against the threat of corporate raiders.[17] It is clear from SEC’s remarkable history that the Lee family has used its stra