Trivia question: What's a semiconductor company that doesn't make semiconductors?

Trivia answer: Very profitable.

That's what chip maker LSI Logic (NYSE:LSI) is hoping, anyway. Yesterday, the company announced plans to sell a manufacturing facility in Gresham, Ore., with the apparent goal of becoming what the industry calls "fabless." That's code-speak for outsourcing manufacturing in the same way that mobile-computer makers such as Motley Fool Stock Advisor pick Dell (NASDAQ:DELL) and Apple (NASDAQ:AAPL) do. LSI currently manufactures 70% of its own chip designs.

Going fabless isn't new, of course. Dozens of chip makers have done it, including Stock Advisor recommendation ARM Holdings (NASDAQ:ARMHY). These companies have consistently delivered higher profits than their soup-to-nuts counterparts, with the notable exception of behemoth Intel (NASDAQ:INTC). For example, ARM notched a gross margin of 89.9% over the trailing 12-month period, while LSI came in at 42%.

No one has anted up for LSI's plant yet. But if a buyer is found, it would accelerate the restructuring that the company announced last month. Semiconductor industry trade magazine EE Times reports that LSI CEO Abhi Talkwalkar, who stepped into the role last May, is in the process of refocusing the company on key markets, including custom integrated circuits, consumer electronics, and storage devices.

LSI isn't saying what it will save by jettisoning yet another of its manufacturing plants, but investors appear skeptical; they've sent the company's shares lower by more than 3% as I write. I think they're right. Sure, LSI will see some upside. But the biggest benefactors are likely to be the low-cost chip factories in Asia, including Taiwan Semiconductor Manufacturing (NYSE:TSM) and Semiconductor Manufacturing International (NYSE:SMI). Each has taken on an increasing role in producing LSI's chips in recent years.

Taiwan Semi strikes me as the more attractive of the two, since its boasts roughly $1.5 billion in free cash flow, according to Yahoo! Finance. That appears to be more than enough to fund a very juicy 3.8% dividend yield. The news may be coming out of LSI's Milpitas, Calif., headquarters, but, for this Fool, the investing opportunity is in Taipei.

We've chipped in further Foolishness:

  • Is LSI lying in wait? Maybe.
  • At least one other Fool believes Taiwan Semi has rounded the turn.
  • Should this reorganization even be necessary? Revenue guidance was up in June.

High tech. Biotech. Nanotech. Any tech. David Gardner and his merry band of Fools cover it all for subscribers to Motley Fool Rule Breakers . And the approach has beaten the market's average return by close to 10% in its short life. So go ahead; take a risk-free trial today. Your portfolio will thank you.

Fool contributor Tim Beyers could use some chips and salsa right about now. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.