Nvidia's (NVDA 0.80%) GPU Technology Conference was chock-full of announcements, including new hardware for data centers and AI, and the revelation that the company has an $11 billion sales pipeline over the next six years to automakers. Nvidia is extending its reach into all areas of high-end computing, and it's quickly getting recognized as a leading technology platform as a result.
But with all of these new chip designs and services built atop them, Nvidia is going to need to rely on foundry partners (companies that manufacture the chips themselves) more than ever before. When asked about Intel's (INTC 2.42%) efforts to ramp up its foundry business, Nvidia CEO Jensen Huang indicated talks might already be underway between the two companies.
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Rivals, or business partners?
The semiconductor industry, which is on pace to reach $600 billion in global spending this year, is a complex and interconnected web of engineering companies, manufacturing operations, raw material suppliers, and shipping and logistics. It's no secret Nvidia's rise to power as a leader in data center computing has been at the expense of Intel, which has been losing market share on this front. But Intel could remain highly relevant on new fronts besides semiconductor engineering.
Sure, Intel has responded to Nvidia's rise by announcing its own GPUs (graphics processing units). Nevertheless, the crux of Intel's strategy in the coming years has centered less on engineering new chip designs and more on fabrication -- especially as a fab partner to companies like Nvidia that outsource manufacturing. When asked about Intel's fab business plans in a meeting with reporters last week, Huang said that Intel has been an "excellent partner." In fact, Huang said Intel helped build the first-gen Omniverse computers, the OVX PODs used in data centers for creating "digital twins" of real-world spaces.
Commenting further on the matter, Huang said Intel is "interested in us using their foundries," and that Nvidia is "very interested in exploring it." Currently, Nvidia sends a great deal of its fabrication needs to Taiwan Semiconductor Manufacturing (TSM -0.28%), which commands over 50% of global chip fab market share. Huang mentioned TSMC's strength has been in its ability to "dance" with over 300 chip design partners. Intel has historically focused on manufacturing its own chips, not those from rivals. Making this switch will be a big challenge.
Nevertheless, it seems the two companies are in talks to pair up on this front. It will take years for Intel to complete construction of its new facilities, staff them, and then ramp up production of chips. But Nvidia's comments are a good early sign that Intel's shift in strategy will eventually pay off.
Diversifying is critical to future chip industry security
The chip shortage the world is currently experiencing is the result of several factors. On the supply side, there simply weren't enough chips available after early pandemic lockdowns, a result of the U.S.-China trade war a few years ago followed by temporary shutdowns of chip fabs around the world in response to COVID-19. And as for demand, semiconductors have become increasingly critical components to literally everything, and needs are only going up as complex products like autos increase the number of electronic parts in their assembly.
In light of this chip shortage, a key to Nvidia being able to grow at such a fast pace last year (sales were up 61%) was redundancy. Huang said every layer of the business has built-in redundancy, from the design of the chips themselves to supply chain outlets to foundry partners. If one system or supply partner fails, another is waiting in the wings as backup.
Building more redundancy into the system is critical, and not just for Nvidia but for the entire semiconductor industry. As efficient as it has been to rely on specialized foundry giants like TSMC, the pandemic and now Russia's invasion of Ukraine have illustrated the need for companies to localize some of their chip manufacturing (and supply of basic products and raw materials in general). In addition to committing to new U.S. fab construction, Intel also recently unveiled 33 billion euros in spending in Europe on chip research and manufacturing. If Nvidia wants more built-in redundancy, Intel is rising to fill that need.
It makes perfect sense that fast-growing Nvidia, Intel, and other semiconductor companies would upgrade their status from "competitors" to "frenemies." Chips are the basic building blocks of all computing technology, and securing their availability is a matter of business and economic security. Look for more updates on these negotiations in the years ahead as Intel begins construction on its new foundry business.
