Chip giant Intel (NASDAQ:INTC) is one of the few companies remaining that develops its own chip manufacturing technologies and then uses those technologies for the bulk of its computer chip shipments.
The reality is that developing new chip manufacturing technologies is both difficult and expensive and the costs to build, equip, and operate cutting-edge chip manufacturing plants are enormous. Only companies that generate a lot of revenue from chip sales can justify building their own chips.
On Intel's most recent earnings conference call, the company said that it expects to grow its capital spending on logic technology -- that is, the technology that's used to manufacture processors and other related chips -- by $1 billion compared to the levels seen in 2017.
Let's go over what's driving that increase.
Higher demand for 14-nano chips
One of the key drivers of Intel's logic capital spending growth in 2018, according to CFO Robert Swan, is a need to increase capacity for its currently in-production 14-nanometer technology.
Since Intel's 14-nanometer technology began production in the second half of 2014, Intel has transitioned an increasing number of products to the technology. Nearly all of Intel's processor products available today are manufactured using that technology.
So, as Intel has shifted an increasing percentage of its products to this technology, it has needed to grow the amount of manufacturing capacity for this technology. Examples of products that'll move to Intel's 14-nanometer technology in 2018 include the company's Platform Controller Hub (PCH) chips as well as its upcoming XMM 7560 cellular modems.
However, it's not just a question of Intel transitioning its products to this technology that's driving this increase. In fact, since it has continued to roll out new products using its 14-nanometer technology, it has needed to build chips using that technology that incorporate more functionality than their predecessors did.
That increased functionality generally means that chip sizes have increased. So, if the average size of a chip manufactured on the company's 14-nanometer technology has grown (the increase is quite notable for Intel's late 2017/early 2018 product launches), then more manufacturing capacity is needed just to continue to ship the same number of units.
It's also important to note that Intel seems to be enjoying higher demand for its 14-nanometer products. The company's personal computer chip business has continued to outperform expectations, so it's only natural that Intel put more manufacturing capacity in to make sure it can meet demand.
On top of that, Intel's other businesses -- particularly its Data Center Group (DCG) and Internet of Things Group (IoTG) -- have continued to see solid growth, so Intel needs to be sure that there's enough 14-nanometer manufacturing capacity in place to support those businesses as well.
Investing in the future
In addition to putting more capacity in place to support the manufacturing of 14-nanometer chips in 2018 and beyond, the increase in Intel's logic-related capital expenditures also incorporates spending involved in, to quote Swan, "scaling up 10-nanometer."
Although Intel's 14-nanometer technology is used to build virtually all of its products today and will likely be used to build most of its products for the entirety of 2018 and quite possibly for a decent portion of 2019, the company is preparing to transition its products to a new technology known as 10-nanometer beginning in the second half of 2018.
Compared to the current 14-nanometer technology, 10-nanometer technology promises significant improvements in chip power efficiency, though bringing this technology into mass production has proven quite challenging for the company. Since spending on equipment and factories happens in advance of mass production and, ultimately, commercial shipments, it's little surprise to see Intel laying out the cash now in preparation for a transition to 10-nanometer products.
And finally, Swan mentioned that the company is "investing in the next node," known as 7-nanometer, during 2018. It is unlikely that Intel is putting in significant manufacturing capacity for its 7-nanometer technology at this point since mass production is probably years away, but it does need to invest in the equipment that'll be used to develop this technology. I would imagine only a small part of Intel's logic-related capital spending increase in 2018 is driven by the 7-nanometer efforts.