Intel (INTC 1.48%) and its CEO Pat Gelsinger have made it clear that the Foundry Services (IFS) business -- where it manufactures chips on a contract basis for other semiconductor designers -- is key to its future. The former king of the chip industry has touted picking up manufacturing contracts worth billions of dollars in future revenue and is in active discussion with seven of the 10 largest "fabless" (no manufacturing division) chip designers.

One of those top chip giants is Broadcom (AVGO 2.76%). However, during Broadcom's last earnings call, its CEO Hock Tan made some disappointing remarks for Intel investors hanging their hopes on IFS. Was Intel dealt a blow?

Chip companies want to save money too ... or do they?

Broadcom, as well as many other top fabless chip designers like Nvidia, Advanced Micro Devices, and Apple's in-house silicon team, make use of contract chip manufacturing. Far and away, the top dog in advanced chipmaking is Taiwan Semiconductor Manufacturing (TSM 0.94%), more commonly known as TSMC. In fact, some 90% of all the most advanced chips produced in the world come from TSMC.  

Broadcom itself says it sources about 90% of the silicon wafers it needs for its chips from TSMC. Given Broadcom's tremendous size (nearly $30 billion in trailing-12-month chip revenue), this is a major customer that Intel would obviously like to court.

But there's a potential problem. Given the increasingly complex process of manufacturing high-end chips, paired with a high rate of base material and wage inflation in the last few years, TSMC has been passing through some high price hikes to its customers in recent years. In early 2021, TSMC announced price hikes of as much as 10% to 20% and as much as 9% in 2022. More recently, hikes of as much as 3% to 6% were announced for the coming year (2024).

Given the price rises at TSMC, Intel's new service could hold appeal for many fabless designers. After all, controlling manufacturing costs is key to turning a profit for fabless chip designers. The possibility of leaving TSMC in favor of Intel was asked of Tan during Broadcom's last earnings call. Tan's reply was telling:

We tend to be very loyal to our suppliers ... And so we continue that way. And because of that partnership and loyalty, for us, price increase is something that is a very long-term thing, and is part of the overall relationship. And put it simply, we don't move just because of prices. We stay put because of support, service, and a very abiding sense of commitment mutually.

In other words, price increases are part of doing business in the semiconductor industry. Indeed, TSMC has apparently used accepting price hikes as a way for its customers to secure manufacturing capacity in subsequent years -- especially as the cost of manufacturing each step-up in chip technology gets more expensive. Intel can build out IFS and even get aggressive in pricing its service, but that's not a guarantee that customers will automatically come.  

What advantage does Intel have?

That isn't to say Intel has no ability to woo over big customers like Broadcom, though. What could sway a titan like Broadcom to the IFS fold?

Tan did mention in his response that factors like the geopolitical environment could have a bearing. Nearly all of TSMC's operations are in Taiwan. Mainland China has been making overtures toward reunifying the island with the rest of the country (suggesting it might do so by force) since Taiwan broke away during the unofficial end of the Chinese civil war in 1949. An invasion of Taiwan (presenting a sizable disruption to TSMC's operation, to say the least) would wreak havoc on the global semiconductor supply chain as it stands today.  

As a second factor, Tan also said new manufacturing technologies could also be explored to diversify its existing supply base. Perhaps some specific Intel foundry capability has caught Broadcom's eye for a future project. 

Additionally, it isn't unusual for a company like Broadcom to diversify its supplier base a bit for the sake of operational resiliency. However, given that ultimate pricing at TSMC tends to be based on the volume of chips ordered (discounts are naturally given as larger orders are placed), a total IFS coup seems highly unlikely. Neither Broadcom nor any other fabless chip designer, is likely to leave TSMC over something as petty as normal annual price hikes. 

How could Intel win?

An overthrow of a tech manufacturing leader tends to take place when said leader has a number of missteps -- which is how Intel lost its lead to TSMC in the first place, as it fell behind in chipmaking capabilities over the last decade. 

INTC Revenue (TTM) Chart.

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Besides narrowing the gap with TSMC's manufacturing processes (Intel is making progress on this front), it likely would also need TSMC to miss once or twice in its execution of upcoming tech manufacturing process rollouts. As chipmaking continues to get more complex in the coming years, there's a real possibility that it could happen. 

In the meantime, TSMC looks secure in its position as the go-to supplier for advanced chips. Intel still has a steep uphill battle ahead of it.