A Potential Problem for Qualcomm, Inc.

Anyone who follows the semiconductor industry knows that the top dog when it comes to anything and everything mobile is Qualcomm (NASDAQ: QCOM  ) . From the lowest-end smartphones to the highest-end flagships, the company has a perfectly suited product for each category. However, as the high end of the smartphone market slows, and as next-generation semiconductor manufacturing technology becomes more expensive on a per-transistor (that's the building block of a chip) basis, Qualcomm may run into economic difficulties.

Cost per transistor goes up at 20-nanometer ... and Qualcomm is doubling transistor counts
According to Handel Jones of International Business Strategies, the cost per transistor of TSMC's (NYSE: TSM  ) 20-nanometer node (upon which Qualcomm's high-end 20-nanometer processors will be built) is set to increase slightly over the prior generation.

Source: IBT via Broadcom.

You might think that this cost increase isn't all that bad, but the mere fact that it increases at all is devastating. Take Qualcomm's 28-nanometer Snapdragon 800. According to Chipworks, the die-size comes in at about 118 square millimeters. Given that Apple's A7 -- built on a similar 28-nanometer process -- can pack about 1 billion transistors into about a 102 square millimeter area, we can conclude that the Snapdragon 800 has roughly 1 billion transistors.

Qualcomm says the Snapdragon 808 and 810 (next-generation parts built on TSMC's 20-nanometer process) will be "multi-billion transistor" designs. Let's assume, for the sake of discussion, that this means the Snapdragon 808 is a 2-billion transistor design and the 810 (with beefier graphics, more CPU cores) has 2.5 billion transistors. This would suggest the cost of building these chips will be twice or more that of the prior generation.

Who eats this cost?
Assuming the cost per transistor information above is accurate, someone is going to eat these increased costs. Will it be the handset OEMs like Samsung (NASDAQOTH: SSNLF  ) and LG in their perpetual race to win the benchmarks? Does Qualcomm take the hit? Looking beyond 20-nanometer, will the industry really be so eager to adopt these next-generation technologies and to put their focus on the slow-growing premium phone market?

Interestingly enough, at the J.P. Morgan Global Technology, Media and Telecom Conference, Qualcomm CFO George Davis noted that the company's QCT division would probably not hit the company's long-term 18-20% operating margin targets this year due to the ramp-up of 20-nanometer products. This suggests that TSMC, the industry's leading foundry, is the primary beneficiary here. While Qualcomm is probably passing some of the increased costs to the device vendors, Davis' comments suggest the company will absorb some of those expenses as well.

Foolish takeaway
Unless cost per transistor resumes its historical trend of declining substantially in subsequent generations, we are likely to see stagnation at the high end of the mobile chip market as the economics begin to break down. Interestingly enough, while TSMC's actual manufacturing costs may be trending upward per transistor, the foundry industry has essentially consolidated into two general purpose players at the leading edge: TSMC and Samsung.

With only two choices, the cost per transistor increases may come from both foundry manufacturing costs and a realization that the fabless players have, more or less, nowhere else to go. Qualcomm, as cash rich as it is, probably doesn't want to make the huge capital investments required to build its own fab, nor does it want to fund the continual research and development required to keep up with the foundry players.

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Comments from our Foolish Readers

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  • Report this Comment On June 03, 2014, at 4:51 PM, willy325 wrote:

    The only potential problem QCOM has is to decide how much of their VAST profits should be distributed as dividends.

    This company is a solid winner for the next couple of decades and smart enough to migrate their business in the direction of future profits.

    You just don't have to look for "potential" problems in oder to get investors to read your articles because that is just more baloney they do not want or need.

  • Report this Comment On June 03, 2014, at 8:30 PM, cdma1engineer wrote:

    If Qualcomm has this problem, then they ALL have this problem. So why would it be a problem different than others have?

    I agree that most of your articles are based upon your own fighting windmills with poorly thought out propositions.

    Think about this, the cost per transistor has historically gone UP as one transitions to a new process. Been doing this for quite a few years. But over time the innovators have always managed to either move to the next process or innovate the manufacture of the present process to gain back those extra pennies per sq mm.

    Also, the Operating systems on these smartphones have been growing faster than the silicon can increase in computing power and battery life. This will push the curve ever onward.

    I suppose that one could be using a Pentium 2 and windows 98 and stay very cheap and very fast, but why would they? No, the processor in the PC has gotten about 100 times faster and more powerful, yet the overall basic times for execution has stayed about the same, so the software complexity has grown by that same amount. Perhaps Qualcomm should focus more on OS optimization than on silicon shrinking and they would gain more ground and cost effectivity.

    Perhaps the users are overbuying the amount of processing power, cores, bit widths than what they need for the high end smartphones.

    I think if you really examine Qualcomms overall business plan, they are producing cheaper chipsets in response to their competition and have also built high end chips to allow the bleeding edge developers to be satisfied.

    I think they are just about right where they should be. Who dropped out of the market this week? Oh yea, BRCM. Who has been absent from this market for about 18 months? Oh yea, Nvidia. Who has been out trying to BUY sockets for their wireless chipsets? Oh yea, Intel.

    Who just makes their chips and supplies them to their customers on a sound cost and value basis Year over Year?.....

    Oh damm, I gave you another click.

  • Report this Comment On June 04, 2014, at 12:39 AM, dealcorn wrote:

    When Moore's Law works, the cost per transistor drops significantly for more advanced nodes. Aggregate worldwide demand for leading edge mobile transistors is too small to justify the level of investment necessary to sustain Moore's Law. Intel is properly positioned to (temporarily) get around this problem by amortizing most of it's process development costs against the larger base of PC demand. Conventional wisdom is that only Intel can now provide reduced cost per transistor benefits as it moves to more advanced nodes. This benefit has no value if Intel makes rookie errors in it's mobile efforts. However, if Intel learns from it's prior mistakes and provides compelling products, the potential for rapid share changes is immense.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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