Evan Niu (TMFNewCow)

Those bottlenecks at Taiwan Semiconductor Manufacturing (NYSE: TSM) are putting a major crimp on Qualcomm’s (Nasdaq: QCOM) style. The largest contract chip manufacturer in the world continues to struggle to meet demand for its 28-nanometer process technology, while many of its Western customers anxiously wait, with bated breath, for the day they can fulfill their own needs.

Qualcomm Snapdragon. Source: Qualcomm.

NVIDIA (Nasdaq: NVDA) is also being held back as its newest lineup of Kepler GPU chips uses the same process, while Qualcomm’s newest Snapdragon S4 mobile processors, as well as baseband modems, are all built on 28-nanometer processes. The list of inconvenienced customers goes on.

Enough is enough. Qualcomm has two ways to deal with these shortages.

Plan A
In the short-term, Qualcomm has decided to broaden its horizons with manufacturing partners, and has recently tapped United Microelectronics (NYSE: UMC) and Samsung for its 28-nanometer needs, according to a recent report from Taiwan Economic News.

Instead of relying on TSMC for over 90% of its capacity, it will bring in UMC to produce between 3,000 and 5,000 wafers per month, roughly 20% to 30% of what TSMC provides for Qualcomm. UMC is said to start pitching in during the fourth quarter.

Plan B
Looking at a potential longer-term solution, Qualcomm CEO Paul Jacobs even recently said that he was somewhat open to the idea of building its own manufacturing plants, which would be a dramatic strategic shift away from the fabless model it has long employed, and towards one of vertical integration, a rarity nowadays in the semiconductor industry. Intel remains the last big domestic chipmaker standing that operates its own chip foundries.

"[Building our own plants is] not something that's high on our list of things that we want to do," Jacobs said, "But I wouldn’t rule it out completely."

That’s a tall order to fill, because building and operating chip fabrication facilities is a multi-billion dollar commitment in capital expenditures. For example, Intel spent nearly $3 billion in total capital expenditures last quarter, much more than the $635 million that Qualcomm ponied up. Smaller NVIDIA spent less than $29 million.

Qualcomm generates plenty of operating cash flow, $3.7 billion last quarter, which it typically invests in short-term securities. Of its investing cash flow, it invested a net of $4.5 billion last quarter. Those dollars could be redeployed into a fab if need be.

It hasn’t come to this, but it’s clearly a distinct possibility at the rate things are going or, rather, aren’t going, at TSMC.

Sharing is not caring
These chips are incredibly important for Qualcomm, as its dual-core Snapdragon S4 is found in the latest generation of Google Android devices, including Samsung’s Galaxy S III (domestic version) and HTC’s One X (domestic version). The international variants of both those devices carry different chipsets that don’t have integrated 4G LTE, like the S4 does, Samsung’s own quad-core Exynos, and NVIDIA’s quad-core Tegra 3, respectively. With much of the rest of the world trailing in 4G LTE adoption compared to the U.S., this functionality is less appreciated in other geographies.

Meanwhile, the next generation of baseband modems is virtually a lock to serve up the data in Apple’s (Nasdaq: AAPL) sixth-generation iPhone, bringing with it 4G LTE support for the first time to the iPhone, along with the important compatibility with China Mobile’s network. This paves the way to that pair’s inevitable partnership. This year’s iPhone is expected to see the most aggressive upgrade activity in years, so Qualcomm’s going to need an awful lot of these things. At the same time, Samsung fabricates Apple’s A-family of processors, with the recent A5 and A5X being produced at Sammy’s facilities in Austin, Texas.

When it comes to outsourced chip fabrication, sharing is definitely not caring.

Mobile processors will play a large part in the next trillion-dollar revolution and, despite Qualcomm’s leadership in the sector, this company continues to gain traction at Qualcomm’s expense, and investors need to know about it. It’s grabbing increasingly more processor design wins in the next generation of smartphones and tablets, and is also less affected by the supply shortages facing the semiconductor industry. Grab this totally free report to read more.