September 15, 2010
The chip manufacturing industry is shifting westward. Not too far, you understand -- today's hegemony in the Far East is starting to share the cake with an upstart in the Middle East.
Since Abu Dhabi investment agency ATIC bought a majority position of the semiconductor foundry operations of Advanced Micro Devices (NYSE: AMD ) and Chartered Semiconductor Manufacturing, the new owners have been pumping boatloads of cash into the Globalfoundries venture. Now there's a $3 billion manufacturing plant under construction in New York state, but that's dwarfed by a fantastically expensive $7 billion foundry planned for construction in Abu Dhabi itself.
A sudden $10 billion boost of Globalfoundries' factory capacity is very significant. Chartered brought about $20 billion of plants, property, and equipment to the table (after depreciation), and AMD's equipment was worth much less. With this infusion, Globalfoundries becomes a serious rival to industry leader Taiwan Semiconductor Manufacturing (NYSE: TSM ) , which has $33 billion of equipment in place today.
This is good news on many levels:
- More competition fosters innovation and customer-friendly pricing policies. Fabless chip designers like Broadcom (Nasdaq: BRCM ) and NVIDIA (Nasdaq: NVDA ) would love to have a matched pair of competing foundries fighting over their business.
- The next time a global recession turns into refreshed demand for chips, the foundries will be able to support higher order volumes instead of becoming a bottleneck for the upturn.
- And of course, $10 billion of new construction means lots of equipment sales to fill the factories. Shareholders of MEMC Electronic Materials (NYSE: WFR ) , Nanometrics (Nasdaq: NANO ) , and KLA-Tencor (Nasdaq: KLAC ) , among other testing and fabrication equipment makers, will absolutely love it.
Will Globalfoundries win this race, or simply push Taiwan Semi to try harder? Either way, I think we're looking at a new era of globalized chip manufacturing, after decades of exclusively Asian-centric operations. Share your thoughts on how this trend will change your portfolio using the comments below.