INTC and TSMC
INTC and TSMC are the two dominant manufacturers of semiconductor chips in the world. INTC is a proprietary manufacturer; TSMC is a foundry, that is, a third-party fabricator of designs created by others.
Because of its huge share of the market for microprocessors put into personal computers and servers, INTC generates enough yearly revenue to justify making the chips itself. Other than Samsung Electronics, almost no one else has that scale. Instead, most firms design chips and outsource their fabrication to specialized manufacturing foundries. The most sophisticated of these is Taiwan Semiconductor Manufacturing Corporation (TSMC).
As I’ve written elsewhere, I think INTC is an attractive stock for income-oriented investors.
One chink in INTC’s armor
The one knock against the company, however, has been that while it dominates the market for processors for PCs, it is, so far at least, a non-factor in the market for smartphones and other internet-centric devices. INTC understands the virtues of diversification and has been trying to establish related businesses for what seems to be decades. It hasn’t been very successful so far, it seems to me, despite the advantages of huge cash flow and a continuing supply of completely depreciated semiconductor fabricating equipment as it upgrades its microprocessor-making capabilities.
The latest new arena INTC wants to enter is the emerging market for smartphones, internet tablets, browsing devices.
The Atom chip
The Atom has been a smash hit among netbook manufacturers. The reasons for this are not 100% clear, though. The initial concept for netbooks was to create a non-Windows device that would boot up almost instantaneously, have most of its storage on-line and wouldn’t need the power of an Intel chip. The market was seen to be schoolchildren.
The big buyers turned out instead to be businesspeople looking for ultra-light laptops to use on the road, and college students. Both wanted Windows–which, in turn, required the power of Intel chips. Part of the preference for a Windows interface may have been familiarity, but part was certainly how cumbersome most users found linux to use.
The ARM alternative
Design companies other than INTC typically use a processor core that they license from a company like ARM Holdings plc. They then heavily customize it and have it made by a foundry company like TSMC.
To appeal to these potential users, the INTC-TSMC technology agreement was reached about a year ago. TSMC got access to the Atom CPU technology that semiconductor design firms would be allowed to customize for a variety of applications. By leaving a significant role in the final product for other semiconductor design firms–who are presumably much more familiar with smartphone-like internet surfing devices, INTC was taking a page from the ARM book. It was deviating from its customary strategy of presenting manufacturers with a standardized finished product, which INTC would manufacture in very large quantities.
The TSMC venture on hold
Two weeks ago, according to the New York Times, INTC and TSMC put their venture on hold. Why? –not enough customers. Why the dearth of takers isn’t clear. Most likely, the INTC solution isn’t so much better than ARM’s to displace it. It’s also possible that semiconductor design firms don’t want to become dependent on the behemoth that has dominated the PC processor market for so long.
Competitors in the netbook sphere
The first serious competitor to Atom in the netbook arena is already on the horizon–the GOOG-sponsored Chrome OS netbooks that will be released later in the year. As far as I can see, these netbooks will be true to the original netbook vision of ASUS, but with more user-friendly non-Windows software. They’ll be driven by ARM chips.
What does this mean for INTC?
Nothing over the next year or two, at least. The big INTC story now is corporations replacing their five+ year old PCs with new machines sporting Windows 7. Remember, given the disaster of Windows Vista, most corporate personal computers are still running on Windows XP. Not only has that operating system gotten long in the tooth, the PCs running them are old–meaning maintaining them is getting increasingly expensive.
Unlike individuals and the smallest businesses, corporations don’t change to a new Windows operating system as soon as it comes out. They wait for the biggest bugs to be found by the early adopters and then fixed by Microsoft before jumping in.
This process normally takes at least a year. But since both hardware and software have “skipped” a generation, the decision to buy new PCs while adopting Windows 7 will probably move faster than normal.
Two developments to watch
1. How successful the iPad and similar devices, virtually all of which will use ARM chips, are.
2. Whether GOOG backing for Chrome can shift netbook users away from the Wintel (Windows/Intel) alliance.
These will give us a better indication of how much long-term growth potential INTC has as a stock, and therefore how much more appeal it will have for anything more than current income.