When Intel (INTC +0.00%) announced that it would be more aggressively pursuing contract manufacturing for other companies (and potentially competitors), shares of another chip giant -- Taiwan Semiconductor (TSM +1.97%) -- saw a sizable decline. The rationale behind this is quite simple: since Intel has superior chip making capabilities, it would be well positioned to gain meaningful share from the foundry players such as Taiwan Semiconductor.
Further, since Intel would likely only be interested in high-margin deals, the fear that Intel could gut Taiwan Semiconductor or TSMC of its highest margin business has begun to soak into Taiwan Semiconductor share price. However, it doesn't seem like it's time to panic -- yet.
TSMC has the big Apple
It has been well telegraphed (even if it's unofficial) that TSMC would be building Apple's (AAPL +2.65%) next generation A8 system on chip on its 20 nanometer process. This has largely been viewed as a significant win for TSMC (which has already benefited immensely from the mobile revolution from many chip vendors), and this business goes a long way to enabling TSMC to invest more heavily in capital expenditures and R&D.
To be clear, TSMC already has plenty of lucrative mobile (and other) business from the likes of Qualcomm (QCOM +1.23%) (which sells more chips into mobile apps processors than Apple ships iOS devices), NVIDIA, and Broadcom. Taking the Apple business would not only give it exposure to one of the most meaningful designers of mobile chips, but it would cut off the revenue stream to Samsung (NASDAQOTH: SSNLF) which has been aggressively pursuing its own foundry business.
The major advantage that TSMC has is that it is the largest and most powerful independent foundry in the world. Unlike both Intel and Samsung, which have their own chip design teams in house, TSMC doesn't design chips -- it just builds the designs of others.
There's very little, if any, conflict of interest here, and it is in TSMC's best interests to keep each customer's secrets closely guarded and treat all of its customers fairly. Also, vis-à-vis Samsung, TSMC's technology is at least as good, if not better, which makes it a perfect partner for Apple.
Investors are worried that Intel wants this business...and more
Investors are (rightfully) worried that Intel's intention, by opening up its foundries, is to win Apple's chip business. While there is certainly an excellent case to be made for this, it's not just about technology.
TSMC has plenty of experience as a foundry and it doesn't pose the risk of a conflict of interest that Intel's own product design teams could potentially lead to. Nevertheless, investors will likely remain on edge about this until a Chipworks analysis reveals that the Apple A8 is built on TSMC's process.
The fear, though, runs deeper. With Intel signaling that it would potentially consider building chips even for its own chip competitors, the worries now run deep that Intel's plan is to simply take much of the high margin, leading edge business from the rest of the foundry world -- making it difficult for these foundries to justify additional R&D and capital expenditure investments.
This would be a bold move on Intel's part, but it wouldn't be without challenges -- particularly as a non-trivial part of Intel's manufacturing lead comes from the fact that it controls the design and manufacture of its own products (which means that Intel can co-optimize process and products).
Foolish bottom line
Realistically, Intel is probably not going to be a material threat to the traditional foundries as a foundry for the foreseeable future. The big risk is that Intel's own products compete aggressively with the foundries' own end products (which would lose TSMC the sale all the same), but given that Intel has essentially admitted that its product portfolio in phones (by far the largest mobile market) won't be competitive until 2015, TSMC is likely to continue to execute well over the next year uninterrupted -- at least by Intel.
