How Can Intel’s Foundry Business Be "Margin Neutral"?

An initially puzzling claim from Intel's newly minted CEO may not be so puzzling after all.

Jan 11, 2014 at 12:30PM

At the JP Morgan Technology conference, new Intel (NASDAQ:INTC) CEO Brian Krzanich gave a pretty interesting presentation filled to the brim with interesting/useful information (unlike the actual keynote which seemed to be mostly fluff). In this article, it is worth exploring one of the more interesting claims that Mr. Krzanich made – that Intel's foundry business would be "margin neutral." How can this even be remotely possible?

Why it initially seems weird
A quick look at the gross margin profile of the world's most successful semiconductor foundry, TSMC (NYSE:TSM), shows that the foundry business isn't low margin by any stretch of the imagination. Indeed, far from it, but Taiwan Semi's 48% corporate gross margin level is quite a bit lower than Intel's – a full on chip designer and manufacturer – which tend to stay within the range of 55-65% (and over the last few years, at the high end of it).

So, at first glance, when Intel's management is out claiming that foundry will be largely "gross margin neutral" (which would tend to imply margins on the wafers in the 55-65% range), investors are likely to initially meet this with a healthy dose of skepticism. After all, given that Intel is used to collecting design and foundry margins, one would expect that the margin hit from simply building somebody else's designs would be pretty substantial.

It can be justified
Intel's "gross margin neutral" claim can be arrived to by taking into account the following factors:

  • Intel, unlike TSMC, does packaging and test services in-house (something that a TSMC customer would need to outsource to a company like Amkor or Advanced Semiconductor Engineering). This is "margin" that Intel can collect.
  • Intel's goal with foundry is to sell performance and density to customers (whom may want to build an edge on a competitor using a traditional foundry), so right off the bat Intel can probably charge premium pricing for the actual wafers.
  • Intel's yields are typically regarded as the best in the industry and beginning with the 14-nanometer generation, the company plans to have a 35% lead in density against TSMC. This means that even if Intel charges a premium for its wafers, this is offset on the customer side by transistors that are cheaper.
  • Intel's depreciation of a given factory is pretty quickly paid for by its own internal products, so once the in-house products pay for the fabs, any further wafers are simply gravy (or, from a different perspective, having others' wafers running alongside Intel's own designs helps get a particular factory paid for more quickly).

Foolish bottom line
Given these factors, it's not difficult to get those extra seven or so percentage points of gross margin advantage over a traditional foundry like TSMC in pursuing its own foundry business. It's tough to quantify these factors at each stage, but this is probably a good "broad strokes" overview of how it's feasible. It will be interesting to see how this all plays out – particularly the impact on TSMC – going forward. 

More compelling ideas from The Motley Fool
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen 6 picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers