Broadcom Corporation Voices FinFET Cost Concerns

It could have massive implications on the semiconductor industry.

May 29, 2014 at 1:00PM

At Broadcom's (NASDAQ:BRCM) most recent analyst day, the company talked at length about the new challenge the semiconductor industry is set to face on the economics of future manufacturing technologies. Mirroring what industry experts like Handel Jones have argued, Broadcom management said it expects that the cost per transistor (that's the building block of a modern chip) will rise in coming generations.

That, in a nutshell, means that as chips get smaller and power and performance improve, it becomes more expensive to add additional features such as bigger CPUs, beefier graphics, and dedicated accelerators. If your customer is willing to pay the added premium for products built on these new FinFET manufacturing technologies, then it's a win, but for cost-sensitive applications it may make more sense to stick to older technologies.

Don't take my word for it -- ask Broadcom's Rajiv Ramaswami
At the recent Cowen Technology, Media & Telecom Conference, Rajiv Ramaswami, executive vice president and general manager of Broadcom's infrastructure and networking group, noted that the semiconductor company would need to be very judicious about what designs it moves to the 16 FinFET manufacturing technology node, and what products it continues to iterate on 28 nanometer. When Ramaswami was questioned about whether the entire networking product lineup would eventually transition to 16 FinFET, his response was, "It's not clear yet."

The idea here is that the products that really benefit from more performance at lower power and the ones that offer the largest return on investment will move to the next-generation node. Broadcom expects that it can raise the average selling prices of these products since they will pack more features and performance. This makes sense -- the "better" product costs more. In a world where Broadcom's principal competitors all build their silicon at the same place, this isn't a problem.

This spells trouble for mobile processors
Broadcom sells big, bad networking chips for, in some cases, hundreds if not thousands of dollars. For the juiciest, highest-margin components, the move to FinFETs won't be a problem. The issue -- which affects the entire fabless semiconductor industry -- is when we start to talk about cheap chips. You know, like mobile applications processors.

If you look at this recent slide from ARM Holdings (NASDAQ:ARMH), you can see a very clear trend: the low-end and midrange device markets -- both of which are cost sensitive -- are on the rise, while the growth in the high end is rather muted (and given Samsung's (NASDAQOTH:SSNLF) recent price cut on the Galaxy S5 relative to the Galaxy S4 at launch, this segment is not immune to average selling price erosion).

Arm Slide

Source: ARM Holdings.

So you've got an industry that is increasingly focused on cost-sensitive products, and it seems that the "obvious" path to improved performance leads to meaningfully higher chip prices. There is most certainly a problem here, and it means that either one of two things will occur:

  • Margins for the fabless chip vendors will erode as the foundries capture most or all of the value of these chips.
  • Mobile chips will become more expensive over time as they get better.

In the first scenario, the foundries win and the fabless chip designers lose. In the second scenario, the foundries and the fabless chip vendors win, but the device vendors lose. A company such as Samsung, which builds its own mobile devices and is increasingly building its own chips, could avoid many of the pitfalls that a fabless player may encounter (also note that Samsung is trying to be a foundry, so it "wins" that way, too).

Foolish takeaway
As the industry advances to next-generation manufacturing technology, a lot of hard choices will have to be made about what manufacturing technology is used. It's no longer in the best economic interests of many players to blindly move everything to the latest and greatest manufacturing technology. This will have dramatic and sweeping implications to the industry, and -- particularly for price-sensitive markets like mobile applications processors -- the advancements through process nodes may slow significantly. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recent recruited a secret-development "dream team" to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa owns shares of ARM Holdings. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information