Intel Samples AMD's Asset-Light Strategy

Intel (Nasdaq: INTC  ) is making new friends. The chip giant wants to spread Atom processors as far afield as possible, so it just signed up Taiwan Semiconductor Manufacturing (NYSE: TSM  ) to help manufacture boatloads of those low-power processors.

In doing so, Intel is treading in the large footsteps of Texas Instruments (NYSE: TXN  ) . It's also validating the boldest move archrival Advanced Micro Devices (NYSE: AMD  ) has made in ages. Welcome to the asset-light manufacturing club, Intel.

Just the facts
Watching Intel hook up with TSMC is no shocker. The two have been at each other's throat over manufacturing-process technologies for years, often racing to the next, smaller trace width, or jostling to implement fancy new technologies like low-k dielectrics and strained silicon. Intel was handling all of its own manufacturing, except for some memory chips made in cooperation with memory expert Micron (NYSE: MU  ) .

Then, last summer, the trans-Pacific rivals embraced in a warm and fluffy agreement to push 450-mm chip wafer technology. Samsung was in on that partnership, too, while AMD stewed on the sidelines, hurling occasional catcalls: "Premature!" "300-mm is enough!" "Not worth the investment!" Despite its booing,  Intel and TSMC ultimately sowed the seeds of cooperation.

Now, that seed has blossomed into a full-blown technology platform agreement. TSMC's chip-designing customers such as Marvell (Nasdaq: MRVL  ) and QUALCOMM (Nasdaq: QCOM  ) may be able to design new systems-on-a-chip around Intel's Atom core, and have them made in TSMC's factories. Intel CEO Paul Otellini says that the move will let other processor designers "customize the implementation precisely to their needs."

It's not exactly an outsourcing contract, since these Atom-based chips would presumably be designed by third-party semiconductor companies. But in some ways, it goes further than a vanilla production-line agreement. Intel is giving others broader access to what is arguably its hottest product right now, and handing off large chunks of the processor-design pipeline to others.

What does it all mean?
So it's a low-risk version of the asset-light model that predecessors like TI or QUALCOMM have embraced. Collecting license fees on third-party products carries higher margins than inserting a new middleman in the manufacturing process, as AMD is doing. But the strategic similarities are striking nonetheless.

This is obviously great news for TSMC. It's also a bit of a condescending pat from Intel on AMD's tousled scalp, and it might give Intel a taste for bigger asset-light moves in the future. In short, everybody wins. (Except maybe AMD.) This deal is a recipe for sectorwide success in these lean times.

Further Atomic Foolishness:

Intel is a Motley Fool Inside Value pick. The Fool also owns shares and covered calls of Intel. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund owns shares in AMD and TSMC, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On March 03, 2009, at 10:11 PM, SwampBull wrote:

    Selling a fraction of the Atom manufacturing to TSM can hardly be called an asset-light strategy. Intel's manufacturing is still one of its greatest strengths, and accounts for all of its other products to meet the server, desktop, and mobile markets. Atom is a great product that will open the doors to more small form factor devices in the future.

    The rest of this article makes sense to me, but to say that Intel is part of the "asset-light manufacturing club" is extremely premature given its recent $7B announcement regarding expanding its fabrication facilities in the US.

  • Report this Comment On March 04, 2009, at 7:20 AM, none0such wrote:

    I agree with the Mr. Bylund.

    I believe the 'asset-light strategy' is in the new opportunities available to those companies wishing to take advantage of integrating the Atom in their SoC designs - that way Intel can get their product to a wider market and capitalize capturing market share. Furthermore, Intel is facilitating better and new kinds of products by doing this because of TSMC's quality, quantity and speed to market - if companies had to wait for Atom orders to be filled by Intel (which happened in 2008), they may become inclined to design with a different processor.

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