Intel announced last week that it would expand its business into chip fabrication, with plans to open up foundries on-shore in the continental United States.

Aswini Kumar, Taiwan Center for Security Studies

Intel’s Power Move

Intel’s chief executive officer, Pat Gelsinger, astonished the world’s supply chain market last week by saying the company would go into the foundry business. It will also set up an independent business unit, named Intel Foundry Services. Gelsinger said the company will continue expanding partnerships with multiple contract chipmaking providers, including TSMC, Samsung, United Microelectronics and GlobalFoundries. Gelsinger’s strategy of co-opetition could be analyzed in a duo-pronged approach, either mutually beneficial or an attempt to gain the upper hand in the chip-making business. Since 2016, TSMC has been the sole iPhone processor maker and since last year, began to produce Apple’s in-house designed CPUs for MacBook computers, while Intel was behind in market. TSMC also often shares orders with Samsung to yield high-end mobile processors for Qualcomm. Moving forward, TSMC will face severe pressure from this new strategy of Intel, which tried to start up a plant in the same place as TSMC in the state of Arizona.

TSMC’s shares have dropped around 3% since Gelsinger’s announcement. Intel’s new strategy to get back into semiconductor leadership has been favoured by investors. But Taiwanese chip champion TSMC still seems confident in their ability to endure this challenge. The imminent impact on TSMC is dubious: Recent chip scarcity implies it has more business to deal with than it can. For the moment, Intel will still need to outsource the making of its most advanced chips to the likes of TSMC. Mr. Gelsinger’s IDM 2.0 vision will imply to Asian rivals like TSMC and South Korea’s Samsung Electronics that other manufacturers are seeking to join in producing cutting-edge chip-making technologies. 

This year, Intel will spend huge amounts of capital to catch up, raising by more than 30% to between $19 billion and $20 billion while building two plants in Arizona for $20 billion. It is anticipating demand for advanced chips will expand the costs and justify the cash expenses. Intel’s previous attempt at entering the foundry business, in 2013-14, went nowhere. Last July, Intel reneged from unveiling its most advanced chip processing technology of 7nm to 2023. Indeed speeding up the race for semiconductor production leadership to its Asian rivals TSMC and Samsung. 

TSMC as it Stands

On the other side, TSMC isn’t resting still. The tech giant has increased this year’s capital-outlay by more than 40% to between $25 billion and $28 billion. According to Trendforce, Taiwan and South Korea, neighbours of China, alone have more than 80% of the foundry market. TSMC alone has more than half. However, Asian foundries are alleviating U.S. anxieties. Last year, TSMC announced it will spend $12 billion to build a plant in Arizona. Samsung is exploring tactics to spend about $17 billion building U.S. plants.

Even though Intel employed a great strategy of more investment and entering the foundry again to get more customers to share the cost, it would be difficult to conquer major customers and overthrow the crown from TSMC. TSMC has had years of serving a diverse customer pool including Apple, Nvidia and appreciates a better cost structure. It is also unladen by the inherent conflict of interest Intel endures, as a company that has been upholding Integrated Chip Design For Manufacturing (DFM), and sells its own fabricated ICs. Which actually creates less credibility and reliability as it relates to copyright. As some of its desired customers like Amazon, Cisco, Ericsson, Google, IBM and Microsoft are also developing their own chips. Intel says it will keep the foundry independent, but customers like AMD and Apple will likely hesitate to give Intel their contracts. 

The Geopolitics of Chips

This becomes a significant issue as backed by geopolitics in the international arena. As the U.S. has been striving to possess a secure domestic semiconductor supply chain, the new plan of Intel fits well in its strategic vision. U.S. Secretary of Commerce Gina M. Raimondo acclaimed Intel’s investment plan in Arizona, saying it will aid “to preserve U.S. technology innovation and leadership, strengthen U.S. economic and national security.” On employing timely strategy, Intel can await substantial government backing, since the new US administration has emphasized semiconductor manufacturing in its national security. 

These announcements are intended to run counter to an Asian-dominated supply chain, or in some ways integrate them with US-domestic supply chains. As China seeks to move in on the chip manufacturing industry and is investing heavily in the tech space, Washington and its allies will indeed revisit its strategies to ensure their strategic advantage. At which point, industry-leaders such as Taiwan may be forced to adapt and grow at an accelerated pace due to the changing dynamics ahead.

Besides this announcement, TSMC has been at its high critical point, as current powers US and China have been striving to increase its budget allocation particularly to indigenous semiconductor chip manufacturing. On March 5th this year, China released its 14th Five Year Plan which exclusively focuses on more funding for chip manufacturing. Striving to reduce its reliance on external supply chains, especially on TSMC. As the trade war turned into a severe tech war between US-China, these initiatives can be a hurdle for TSMC. Thus, Intel back with an ambitious strategy could be a challenging rival, yet TSMC will likely for the foreseeable future, still stay on the throne of the world’s semiconductor business.