Breaking Analysis: Intel Foundry is a bold bet filled with uncertainty

from the cube studios in paloalto and Boston bringing you datadriven insights from the cube and ETR this is breaking analysis with Dave Volante as an American you can't help but root for Intel's CEO Pat gelsinger to succeed his vision to bring semiconductor manufacturing leadership back to the United States is it's more than just a quaint nationalistic sentiment rather it's a strategic imperative for the country the country's military its Global competitiveness and access to Future technological innovations in the AI era but his strategy is dependent upon the success of Intel both as a designer and a leading manufacturer of advanced chips as such this Choice puts Intel in a multi-front war with highly capable leaders in both markets including names like AMD Nvidia AWS Google Microsoft Apple Tesla and other chip designers even now perhaps open AI as well they compete with established Manu ufacturers like Taiwan semiconductor and Samsung moreover Intel's business model has been disrupted by arm which has created a volume standard powered by the iPhone and mobile technologies and finally China Inc looms as a long-term competitor which further underscores the imperative but the trillion dollar questions are what are the odds that Intel strategy succeeds and are there more viable alternative strategies for both Intel and the United States hello and welcome to this week's the key research insights powered by ETR in this breaking analysis we try to address these uncertainties and we do so uh to do so we welcome Ben baharin who's the CEO and principal Analyst at creative strategies Ben good to see you again thanks for coming on yeah it's my pleasure thanks for having me on all right before we get into the discussion I just want to take a quick look at the broad Enterprise technology Market this ETR survey data it comes from uh around a little over 1700 it decision makers it plots Net score or spending momentum um of the plat platform on the vertical axis and its presence in the data which is kind of a proxy for Market penetration on the horizontal axis and this market accounts for about 1.8 trillion of worldwide Information Technology uh or or worldwide it spend if you think of the whole ICT market and you you bring in Telco it's probably up around four four trillion so this is only a subset of the market but nonetheless the graphic shows that AI has become the sector with the most spending velocity since the announcement of chat GPT but the real point is AI is not going to be a distinct distinct sector we think rather it's going to be embedded everywhere in every sector from it hardware and software AIP PCS mobile devices consumer electronics Autos virtually every product is going to have ai and that AI will be powered by silicon chips so Ben let's take a look at the state of the market and the key trends that are relevant here the market has changed dramatically Al over the past two decades you got firms like AMD and IBM got out of The Foundry business arm we talked about capitalized in the smartphone Revolution completely disrupted the established business models when PC volumes peaked in 2011 Intel's Monopoly began to decline TSM became the dominant manufacturer firms like Samsung rose up along the way with many others including a Spate of Novel chip designers like the ones that we mentioned before so Ben how would you describe the CH the changes that have taken place in the market over the last decade or so yeah I think you point to um you know a couple of those key transitions obviously anybody who's focused on this industry and looked at it for a long time recalls the day where intel was really the leader in product design and Foundry manufacturing process technology obviously when we look back and we say you know what happened to Intel over the course of the last decade you know we look at things where they're elongating cycles of mors law they didn't keep up with the same pace of Mor law they moved to um it wasn't Tick Tock it was tick tock tock talk Tock talk all of that driven by economics and Foundry and their ability to keep their foundaries full in that time frame tsmc started becoming more predictable more um conservative as a um as a Leading Edge Foundry meaning that they weren't trying to be too aggressive in their node jumps and because of that they were able to keep relatively straightforward no jump cycles and process development Cycles which became the best option for a lot of companies obviously also during this time until was not a really a third party manufacturer which which I'm sure we'll discuss but you know they they tried Foundry but they didn't really try Foundry like they're trying now um so they really weren't a great second source and you had scale right you had AMD you had Nvidia you had Apple you had Qualcomm you had mediatech you had all of these companies um shipping Millions upon millions of chips every year needing somewhere to manufacture that needing to do so on a quality Leading Edge process and that became TS C and through the course of that process tsmc became the leader in process technology which was once accorded to Intel and now they are still that you now so that's the the dynamic of this battle still comes back to you know who has the best process technology so that the environment all of these you know T chip designers who want to make their products competitive on the best process will come to you and that is by and large right now tsmc yeah thank you for that you know it's kind of actually embarrassing when you look back back with hindsight how Co woke us all up to the digital reality and the notion that we rely on semiconductor technology for virtually everything we were kind of sleep at the wheel there and folks they often talk about you know the global semiconductor supply chain includes companies in many geograph geographies but as as you know Ben it's really not a global supply chain it's a supply chain that's highlighted by some very tenuous choke points so this graphic depicts just some of those and we've start in Taiwan everyone knows we just talked about the TSM and the Razor Edge that they're on with the Taiwan straight and China and apple and its customers rely on TSM for those Advanced chips um and as I say China looms large asml is Dutch company is the sole supplier of EU lithography machines which are required for making the most advanced chips these machines they cost upwards of of a hundred million and they have like 400,000 Parts it's a it's a mindboggling and there are no alternatives to asml for EU machines as you know folks Silicon Valley is the leader in in Eda um and Japan is where you get most silicon Wafers other and other like thin film Technologies from pretty small number of specialized firms and even China which is currently enduring the no chips for you act I call it is where critical Rare Earth elements are found and really highly concentrated deposits which make that country the leader in global supplies so these elements are critical in many phases of Chip manufacturing so Ben how would you describe the current state of supply and semis how do you think about these choke points and the challenges that they present to chip Supply I I think it's one of the things that keeps everybody in this industry especially those who make semiconductors up at night because you do realize that there really isn't a central location where you can just have full autonomy in control of your silicon you know as much as we like to talk about this idea of nationalizing semiconductor manufacturing no country will ever have 100% of the needs as given the graphic that you just that you just said it's it's a it's a globally and tightly intertwined chain that I think people don't fully appreciate which is why collaboration and um and and and being able to work together to have a a a smooth supply chain is necessary and when that doesn't happen things get really bad we we we've seen this over the course of the last few years so I think it's it's one of those things where you've really got to pick how you manage your supply chain whether it comes to Leading Edge or trailing Edge where you can try to minimize any risk because there's always going to be risk right we're not going to see alternatives to asml like you like you talked about where we may have Foundry opportunities in terms of diversity but that's still going to be a range of foundaries that are that are located in different countries and the the the political tensions around those countries so it it's it it's not going to change so sort of my point these these choke points will remain there might be a a little bit more balance again as we get Intel competitive um and Samsung as they continue to evolve in terms of Foundry but those core elements the waer supply testing like you said euv machines we're not going to make those somewhere else so it still really is a a global uh operation and any tensions in any of those environments can throw things off drastically so something you said I want to land on for a second she said it's it's very unlikely that there's going to be like a national supply chain and so that applies obviously for the United States but also applies for China A lot of people are very very much concerned about about you know China taking over TSM Etc but again it if I understand you correctly your premise would be that it's unlikely that even China would uh be able to create a national you know semiconductor supply chain because it's going to rely on Eda software from Silicon Valley other components from Japan Etc is that a fair assertion correct yeah I think if you just look at everything that China's trying to do where even today you know they're using um smic which is sort of their largest manufacturer trying to do things in the Leading Edge not able to get over the euv hump they're having to they're trying to invent processes themselves it's not going well they still obviously need euv machines and then there's political um you know strengths on top of them that's making that challenging where do they get wer Supply it's it's a very mature ecosystem right if you think about it right the this the the the semiconductor industry is one of the oldest just in terms of Technology if you look back to the invention of the transistor and whatnot and it is a very mature Global supply chain and it is intertwined for a reason based on where you get materials who has those core expertise and this is one of the reasons why it'll even be hard for any company to acquire or any country to acquire those assets CH China included so I don't have any belief that changes it appears that as much money as China wants to throw at this problem it's not just a money it is also a talent and is an equipment problem and doesn't look like really any company any country is going to get over that over that hump well we don't see anything changing looking like that's going to change and it's enormous Market I think you know I've seen estimates of half a trillion dollars grown to a trillion dollars you know by the end of the decade you may have better numbers than that I even Lisa Sue said it's a you know the the the AI chip Market is 400 billion so I don't even know that may be additive to the numbers that I just shared but I want to Pivot to Intel strategy generally and its Foundry strategy specifically these are just a few of the relevant promises Intel has made it it's it's integrated device manufacturing 2.0 strategy is really designed to make manufacturing more competitive and efficient both for internal and external customers so they promised to save 10 billion by the time it exits 2025 the company used to have gross margins in the 60% plus range as well below that today in the mid-40s it's promising to get back there eventually with a very aggressive 40% long-term operating margin goal I mean those are those are Oracle like operating margins Intel is building out and they don't really make much hard Intel is building out at least new s six new Fabs that I could count one in Ohio's been delayed but its goal of having 50% of global manufacturing outside of Asia is what that is all about and it's objetive is to return to process leadership and be the second largest Foundry behind TC TSM by the end of the decade so Ben Pat gelsinger he called Intel's first foray into Foundry uh he said it was a hobby um which I think was probably accurate why do you feel or do you feel this time around it's going to be different so I think it's important to to look at like what what happened the first time around that made this difficult until said they would make chip for other people but yet they still drastically prioritized Intel product technology they didn't share that technology they didn't share the Leading Edge with other people and so you look back at at just some of the customer stories of why that didn't go anywhere and it was it was sort of obvious right it was like Pat said it was a hobby it was a very very weak attempt it was one of those things like yeah we'll say we'll do it but at the end of the day you know we're really not we're really not committed to a Foundry effort um this is very different from a lot of different ways not only that there is true division in the company in terms of what Intel product has access to and um and sort of the walls that are put off between Intel product technology and Foundry which is an important reason right because if I'm a competitor let's say I'm AMD I have no idea if AMD is ever going to use until Foundry but let's just you know use this for hypothetical um I would want to be certain that my IP my technology my strategy my road map is not being shared with Intel right because this is an Intel Intel Fab so there is a walls that have to be developed that prior to this really nobody had any confidence was um it sounds like customers are certainly um feeling that there is a process that Intel's put in place to keep kind of Intel products isolated from others is there and then on top of that um there's a Services right part of this business right you tsmc is at the end of the day not just a manufacturer but they are a services company right their customer service is very good they work with their customers they're viewed as a partner they go um you know well beyond what's what's the what's needed in order to deliver for those customers so there's a Services angle to it so when we looked at Intel sort of doing this we those are the things we looked at right how separate is this entity is this truly a company that looks like it's functioning on its own even though Intel is essentially the funer of it which is kind of the way I think about it they are giving them Capital capex that they need that they're you know not getting from either the revenue or from customers right like like tsmc does and so they're basically floating Foundry in a in a in a broader level but at the end of the day are they just treated as a customer and now that it looks like those walls are there a and they are getting customers um you know a rumor came out this week that uh Nvidia is going to use them for advanced packaging and some capacity we know mediate Tech's done a deal with them I think they now have five major customers for uh for Intel Foundry so it it sounds like those customers are viewing this as a legitimate Foundry effort the wins that they're getting sort of the business that they're getting for capacity from tsmc makes it feel like this is very very different again they're not out of the woods there's a lot of execution that has to come in in terms of their um their for nodes in five years meaning that they need to execute on 20a and 18a and whatever is beyond that predictably for customers and and and really it's that customer service point that I think is has drastically changed at least that's what we're hearing from people who getting in and seeing the Intel toys for the first time um and broadly feedback has been pretty good in terms of impressiveness with the technology that's there and that's again I think this first time that truly Intel product is being treated like a customer instead of the priority that they were with Intel Foundry this go around and that's absolutely essential for this to work this time around as W you mentioned four nodes in in five years earlier you alluded to the fact that TSM was much more cautious I about pushing that technology why do you feel that Intel will be able to achieve that I mean Pat has been you know very vocal about hey people said we couldn't do it um TSM took the more conservative approach and that paid dividends what's different about Intel and will it be able to tap those same benefits I think part part of the the problem too that Intel had was they made some very bold density targets in their transition while at the same time they hadn't fully embraced euv right I think when you look at one of the major points that they backtracked on was the way that they embraced euv for foundaries it was very mature they tried something else that didn't work and as a part of what they tried they also tried to be very aggressive in their density goals none of that work right those are the two probably fundamental reasons that cost them um process leadership they've they've now embraced euv and they're now bringing these Technologies to in a more predictable fashion backing off some of those density targets even though it looks like they're relatively on par with with tsmc so those two things kind of changed this right I mean a lot of this was again tsmc's Playbook which they're using um there is a difference though coming with 20a and 18a that I think is really interesting because Intel's trying to do two things at the same time and while it sounds big and and and and difficult it does sound like they're executing these two things which is They're bringing back power which is a new innovation to um manufacturing others will have it as well tsmc Samsung Etc but they're bringing backside power to a node at the same time they're moving to a new transistor technology in ribbon fit uh which is essentially Nano sheet so these two things Thanos sheets which is the broad industry term which everyone will use and backside power which is the same are coming at the same time for Intel with products called you know ribbon fet which is the transistor design and u p power via in initially like this was very concerning to me because you know they're trying to make a a leap here and their track record right hasn't exactly been Stellar in in some of these things and so there was worry that this would cause some delays right that's kind of what everybody was looking for all the investors that we talk to customers in the market they're like we're just waiting them for them to say it's delayed right 20a is delayed 18a is delayed whatever and because of we haven't seen indications of that in fact it sounds like they're taping out customers are sampling on both both of these things the the signs are good that both of those transitions are going to happen at the same time which is which is really impressive because tsmc is not jumping to both of those at the exact same time to the degree that that Intel is and it looks like Intel has pulled that off which which does put them in a competitive position I'm not going to say leading because we can debate what what leading process technology looks like all day but it puts them in a position to be in the conversation with a very quality process and tune new Innovations in transistor design and backside power that it does sound like are very very attractive to customers so it does look like they're on track I think that's positive obviously a delay would be really bad at this point but all of of Ginger's commentary and what you're hearing from customers doesn't sound like that's going to happen that they are going to meet 20a and 18a timelines which to me you know feels positive Ben I want to make sure I understand this thank you for that by the way so my understanding is the tsmc started with euv back as far as I think 2017 so they've got let's call it a six-year lead but you're saying that ribbon fet uh will potentially allow Intel to maybe not leap frog but catch up close the gap and and if I understand it correctly Intel is leading uh in that regard whereas tsmc is perhaps being more conservative do I have that right yeah in in two points right so again Intel calls this ribbon fet this is nano sheet transistor design which both Samsung and tsmc will have Intel's getting there more aggressively first at scale um this is for whatever process it technically equates to which is roughly like 2 nanometer maybe it's just sub 2 nanometer um and backside power right so backside power is the um Which Intel calls power via is the new Power delivery mechanism to transistors it's it's again it's a it's a really big leap um for the first time that we're we're going to see this type of design so we've got a big leap in transistor design right if you go back to Intel's Tik Tok days right a talk was a kind of big transistor shift forward or redesign this is the first one in probably a decade in terms of significance while simultaneously adding a new power delivery mechanism in power via again felt really ambitious but they are um they are right there in terms of delivering at the Leading Edge and I've talked to a lot of folks in the industry who actually think uh Power via so they're backside power technology which is very different than the way that Samsung and tsmc is going to implement it um is actually extremely Innovative and there's a lot of people believing that that will reward them some some very good benefits competitively from a process standpoint compared to others and do you feel that that whatever six or seven year U delay in adopting euv uh is such that the the ribbon fet and the backside power approach that they're taking will allow them to close the gap even even though it sounds like well TSM and Samsung are maybe taking a different approach they are going to be using similar Technologies probably in a more compressed time frame but do you feel like based on what you know that Intel's approach despite that six or seveny year lag will allow them to maybe not leap frog but close that Gap yes I do I do think and I think that their commentary as well as what you hear from the industry and even the fact that tsmc's chairman I think two uh two quarters ago on an earning earnings call even addressed this saying you know that they're not worried they think they'll still have process leadership again that's a huge debate like what is process leadership mean the bottom line is they are going to be right there at a note around two nanometers with a brand new transistor design in ribbon Fett and an entirely new way to deliver power to uh to the transistor via backside power so I whether they're in the lead or not that's sort of irrelevant to me I don't think this whole like I need to be in the lead to win customers plan I think it needs to be a qual quity process technology that's competitive and a viable alternative that's more of what I focused on and from everything we're hearing and we're seeing it sounds like they will be there for sure with with 18a in the 2025 time frame probably scaling in 2026 so I would say so let's kind of try to define a little bit Le frame frame what we mean by Leading and I agree with you you can get into these silly debates about you know what is what but you said quality it's competitive it's a viable alternative alternative I I would add it's got to be profitable and it's got to be done at volume would you agree with that if they can get to those characteristics can we agree that that would be considered leadership yeah I agree and again right your volume Point comes back to they need a customer other than Intel right they're they're not going to become the uh second largest Foundry by Revenue which is the point that Pats makes right he's not necessarily saying uh second second Foundry by volume but by Revenue so that's an asp call so again make high margin chips like nvidia's um server chips right for example Advanced packaging and chiplets very very high margin designs you don't need the same scale you're going to get higher dollar amounts content dollars or dollars in in production but they need more than one customer they need two they need three wafer scale customers which is the term that we use somebody who consumes a lot of wafers in order to make sure that that factory that Foundry that they're spending now right 30 40 sometimes people talking about $50 billion of Foundry which you know back in the day right when we were all doing this in the 2000s this was a Foundry was $10 billion right now it's you know 30 40 50 that's a tremendous amount of money that you need to capitalize and make money on in terms of how you fill that in in in capacity so it's all those things right waer scale High ASP dollars Advanced packaging which is the chipet tech technology comes into that but they need a series of those wer scale customers to come into play and they need to be competitive right the processes to be competitive and it needs to be something that a company believes they can build on and compete with other players who aren't building on that right who might be building on tsmc for example so if all of that happens it's a very positive story for Intel because at the end of the day right if intel pulls this off Intel Foundry will be will be more valuable in terms of Revenue than Intel product right that's that's the end goal here like that that has to happen as a part of this economically but all of those things have to happen wa for scale customers quality process and technology and again customer service and predictability right they they cannot have delays tsmc doesn't have delays they can't have delays so all of that execution has to play in their favor for this turnaround boundary turnaround which is to tied to the Intel turnaround to take place over the next 10 years that's a good lead in so to what I want to do next which is a take a financial snapshot of selected chip designers and manufacturers compared to Intel so this really underscores the multif front war that we talked about earlier and and just a caution these are rough estimates it's not precise it's not made to be you know an investment vehicle but what we try to do in these things and we pull we pull data from you know trailing 12-month Revenue we we do uh uh Revenue multiples off of that the point is really to try to try to get a better understanding of the business model and the framework and the quality of the business so that does tell that story so you look at Intel its Revenue growth has been stagnant although it is promising Improvement its gross margins as I said earlier have been estimated along with its operating margin it's its balance sheet is really not large enough to fund all those Fabs so it's got to do so uh with free cash flow out of its product business but the free cash flow margin is really tanked as well and so all of that has crushed the company's valuation intel was worth around a half a trillion in 2000 and along with Cisco was one of the most valuable companies in the world it's now trading at a revenue multiple that is in the low single digits so if you start in the light blue there are two manufacturers we showing TSM and Global foundaries TSM is the leader as you can see by its financials relative to GFS Samsung is another large player but it's a giant conglomerate so we can't really you know compare it and break it out but TSM is of comparable size to Intel a little bit bigger and it's worth almost four times Intel Global foundaries was formed by taking amd's manufacturing operation and later it got basically got given the IBM micro Electronics division it had a deal with IBM Domin manufactured 10 and I think 7 nanometer Technologies but it it it had to back out my understanding because it was just too hard and and too Capital intensive and so IBM sued the company and that was kind of ugly but Global foundaries at least was able to survive Ben how do you see Intel Foundry servic is stacking up today we talked about that quite a bit relative to these two Sam uh uh uh these two and Samsung they have their site set on 10 billion you know maybe going to do a couple billion in 2024 but my question really to add on the conversation earlier is around the learning curve you know Andy jasse has this comment that there's no compression algorithm for experience U the learning curve for Intel is obviously steep so how do you see them effectively competing in Foundry add to what you said earlier and I'm specifically interested in that sort of compression algorithm and the learning curve and your knowledge of what's required to really get on that curve in this space yeah so I I still think TS MC is probably the best comparable to use in in an analysis I mean I it's it's Global foundaries is there but for the most part you know as you pointed out they they compete at the trailing Edge right so they're at stuff north of of 10 14 nanometer and and Beyond right so that's microcontrollers that's a range of products but they're not competing at the Leading Edge right everybody who makes products today like you said Apple um Tesla Nvidia AMD uh Qualcomm mediatech you know Etc right even though the custom stuff going on at Amazon and Microsoft like they want to be on the Leading Edge right they may not get to the Leading Edge because there isn't capacity and somebody named Apple generally absorbs the vast majority of that first generation Leading Edge capacity but they all want to be there right so so the competition is really for the Leading Edge and interestingly you know when we looked at this from Intel for the past two years our our whole thought process is well they're just going to focus really on the Leading Edge and then recently they just did a deal um where they're actually leveraging a 12 nanometer process technology with UMC and they're doing that in as a collaboration for a custom process which is actually a really big deal and they're going to use their depreciated assets as a part of that which is a very tsmc thing right to do is to take leading Le Fabs that that have already depreciated and you're making money on you're just printing money on and you keep those full didn't think intel was going to do this and now they did right so just a and interesting creative development where you know they're they're leveraging an asset they're taking this book out of tsmc and they're making money from depreciated assets which is is is very smart this is a couple years away from being um into implementation but that Deal's done super super interesting um but at the Leading Edge right this is the part to me that's the most interesting because there is no capacity like you talk to everybody out there and we are up against the absolute limits of Supply we are entirely Supply constraint at the moment at the Leading Edge and for whatever reason you know I've heard different things about Samsung Samsung doesn't seem to be what many consider a viable alternative we don't hear Nvidia we don't hear qualcom we don't hear um you know mediate we don't hear these companies looking to Samsung at the Leading Edge so when I say Leading Edge I mean something three nanometer which is what we're at today and and Beyond right so moving to 2 nanometer 1.5

wherever that goes um they're really not considering Samsung I don't know if that's a process thing I don't know if it's a commitment thing capacity whatever the issue is you hear more about Intel being front and center having customers come in the door evaluating their Tech their their their manufacturing process evaluating their their Advanced packaging and you're seeing them now get deals right there's a lot of customers like I said I think they have five at this point um we don't know who they are we just know that they're big they say their way way for scale like I said invid yeah has been rumored but we don't have any of this terribly confirmed at the moment but the reality is they're getting customers for the Leading Edge Samsung is not so I I say that because when again when you unra unravel this back to the fact that we are Supply constraint the entire industry needs a second source and if for whatever reason that's not going to be Samsung Intel's in a really good position to take some of that and have some of that Leading Edge capacity that Nvidia MD you know Qualcomm Etc cannot get access to with tsmc so I think when you when you put it sort of in that that broader perspective if it paints where they're at with this opportunity at the Leading Edge but I throw in this 12 nanometer deal just to say it does look like they want ifs right Intel Foundry um is willing to be creative and leverage those depreciated assets in foundaries to also make money to offset that Capital burden as well which I didn't think was going to be the pce the case probably a year or two ago interesting I mean you're right I mean hey if Samsung doesn't aggressively compete that opens the door for Intel as a viable Second Source all right I want to come back to that same chart and look at the green these are the a few of Intel's chip design Rivals they got Nvidia AMD and arm which really doesn't you know they license their architecture which is why arm has 100% nearly gross margin but all three of these firms have to me anyway more attractive Financial profiles you know than Intel currently has and they Bor far better multiples of course U Barm just popped this week when it blew away its uh its numbers and raised uh but but the other thing is they don't have to fund factories so Pat gelsinger Ben has said it now cost $30 billion to build an advanced chipm facility can it throw off enough cash from its chip design division in client in data center Etc to fund its Foundry aspirations you just mentioned sort of a clever move that they're making with depreciated assets you know the question is is that enough and at the same time can they compete with the companies that we just showed in the in the blue the chip designers yeah so I think it's a good it's a good way to again understand what what is essentially a separation right of Intel right I get this debate a lot honestly from from folks on the street right that Intel should just split the company that the challenge there is where would they get the money for Foundry right someone has to give them that money the government is contributing there they they have opened up and said look if if anybody wants to co-invest in these foundaries um you know we'll run them we'll use our assets we just need you know we we need more Capital right because this is a a high fixed cost business that's the single thing drawing down their margins is uh is how expensive it is to keep funding these Fabs right and they need to be full right they can't just be capacities and Intel just did you know four nodes in five years they need to to amortize those smartly but at the same time they they need to keep keep those factories full right with with volume so there there's the Intel product which I really less worried about right because at the end of the day Intel can make product at tsnc right Intel's going to be make they do make some products at tsmc they make some tiles for meteor Lake right now as a part of their chiplet design at tsmc for the next road map lunar Lake and others they're making more tiles at tsmc in fact more than meteor Lakes so so they are actually customer and in some cases they're becoming a large customer so at the end of the day it product can keep can keep making their that doesn't change our capacity problem we'll still have a capacity issue with tsmc um if if if intel Foundry doesn't work where now we just got all these people really fighting for the Leading Edge it's that would be a hot mess um but the reality is from a Foundry standpoint right it's it's not like the the turnaround is just not soon like this is the thing I keep trying to tell everybody like the economics of this is a is a 10-year Journey because if we're just going to start at maybe some degree 20a but really 18a like ATA is the one that it sounds like most customers are interested and and Beyond so what's beyond ATA that means that we are looking at the economics of them having to monetize those make make their money from that point forward versus that point backwards so that high fixed cost business Still Remains intact until product can be there until product can can compete I'm not too terribly worried about their designs it really comes down to is the process technology good enough to get enough people so that they keep those foundaries full going forward and those pay for themselves I think it's going to be hard right to monetize these last few despite what they're doing with UMC they just don't do that the way tsmc says so their margins essentially will still be on the rocks for you know the next few years but that's to me the sign that includes this right can if margins improve because of both product but also because of the revenue increase in Foundry then that would be the sign that they're not just sinking all of this money into additional capex to fund foundaries that aren't turning a profit and and that's where I think the financial models for Foundry as itself become very clear Intel's going to release this at the end of the month to a degree they're going to release this are going to talk more about this at the end of the month with their ifs day where they um they get very very deep in the weeds around ifs strategy and what that's going to look like as a business the financial model for ifs so that that will help but it's really a go forward from here can margins improve can they monetize those foundaries most of what you know the last few factories have been um probably won't see that same level of monetization which is again why this is a much longer total financial and value turnaround um than a two to threeyear window yeah I mean the numbers are astounding I mean okay so they're going to maybe squeeze 101 billion dollar of efficiencies you know out of Foundry and internal efficiencies that for a third of a Leading Edge Factory and you saw Sam Altman just uh yesterday was announced raising between five and seven trillion semiconductor manufacturing I mean it seems like those are the types of numbers that we're going to need uh but but I want to revisit rights law we talked a lot about volume we all know Moore's law but the Lesser known right rights law comes important in this discussion so Theodore Wright he was an aeronautical engineer famous for formulating this thing called rights law otherwise known as The Experience curve effect it basically says for any manufacturer or any product it's as the cumulative number of units produced doubles the cost per unit goes down by some constant percentage let's say 15% just pulling a number out but that's probably pretty reasonable combine that with Moore's Law and you you you get you know a duplicative effect and this is highly applicable to chip manufacturing because each new generation of Technology initially costs more to build per unit than the previous generation so when you start manufacturing a new process node you lose money so Intel's Monopoly was one when it beat risk and our premise has always been that it did so because it became the PC standard and PCs were the volume King until early last decade around 2011 they Peak not withstanding you know a bump up in covid and today arm-based designs have a volume Advantage probably 10x the wafer volume so Ben given that arm has that wafer volume Advantage relative to x86 share your scenario as to how to right law plays in this game of semi conductor manufacturing and how does Intel whose volumes are basically flat you've kind of alluded to this but go right to the heart of it how does it get to a point where it's not bleeding money trying to catch up to TSN yeah the big one just goes back to um you know the point I made about needing W for scale customers right they they need people who depend who who who will consume thousands and thousands on thousands of Wafers per month right in terms of production um as you pointed out right that used to be Intel when it was really the PC industry and until had 99 is% of uh of of volume and ship sales at you know high-end compute uh it it was easy for them to monetize that film they were their first best customer to use an Amazon term at high margins and getting the you know Leading Edge quality products it was very easy for them to keep monetizing and move to each Fab because they knew they could fill it with with in with Intel chip capacity that's that's the big sort of run here right Intel produces you know something shy of 300 million chips a year obviously like I said ASP is rising so that helps but you absolutely need need way for scale and so that's where I think you know they've been very clear in fact and and arm has announced this several times on the last few earnings they have pointed out you know that they have a deal with Intel Intel is in a position to make arm ships for anybody that wants it right you got broadcom you got Marvell you got Tesla um I seriously doubt Apper will overdo it but you know maybe if the government forces some some degree of Chip design for local products or government to be you know made in the US maybe they have no choice but but they're very very deep with tsmc um you know Nvidia like I said another one that that's coming there they need those high margin those waer scales and and we know they have a deal with mediate Tech on iot maybe that could come to armest maybe that could come to Qualcomm right I don't think Christiano man said they're not opposed and they've been talking to Intel and exploring it and they're going to pick the best process right that's the thing so that's why comes back to having a true competitive process a predictable road map and a real customer services like mentality which is which is you know the structure of ifs and if they do that they're in a position to get those way for scale customers as again those way for scale customers can't get access from tsmc and I think Qualcomm and media are good ones Media Tech is a Taiwanese company and I know they're very very infed with um with tsmc but but Qualcomm to me is a good example right Qualcomm has not always used tsmc they used um Samsung before uh they compete with apple I think you'd probably argue that they're one of Apple's primary so competitors for you know things you talked about smartphones um obviously moving into Automotive um they want to compete in PCS they they don't have access to anywhere near the Leading Edge that Apple does because of Apple's involvement with tsmc so if anybody in my opinion could completely change this game and would be very interested if intel CL it's going to be Qualcomm and that is a way for scale customer and then some and I think if if they could get that business that would drastically change Foundry and at the same time meaning that you know Qualcomm and team have vetted that Intel process technology is competitive or even better than tsmc's Leading Edge that even puts Qualcomm in a much better position to compete with apple in ways that they can't right now because they just they're not going to be on 3 nanometer they're not going to be on 2 nanometer to the same degree that Apple will for for maybe two years behind just in terms of how this Runs Out in customer priority for tsmc so they they could use that desperately and if that all plays out they're in a very very much stronger position to compete and they're a way for scale customer for for Intel so they're the one based on sort of your point right which is where do they get scale they're the big one they're they're a way scale customer that could be primed to work with Intel and even better compete in the market than they can today because of their limitations to the Leading Edge with tsmc you know to your earlier point be because they've separated Church from State and to the extent that they can get that quality and the competitiveness become a viable alternative get their cost down because of what you were saying about we're maxed out on capacity there's no reason why a qualcom if those other conditions are met you know or I would think even I don't know would Apple you know potentially to hedge its bets use Intel as a second Source if it can get there why wouldn't it yeah it it would and again you know we don't know what's going to happen with Taiwan I mean that is a risk right if for whatever reason we were cut off from Taiwan from Chip access Intel's really the only option in my opinion because even even Samsung who has some scale here it's again not the Leading Edge um and again also not a US company so there is still some risk but but really Intel would be really your only option right so so so we we kind of need them to get there again it sounds like they'll get there from from a capital standpoint but but even you know you me you mentioned what Sam alman's trying to do which I think is is is really interesting also a super complex problem he's he's gonna be at at Intel's ifs day at the end of this month so we'll see what he says but Intel has been very vocal they said listen if anyone wants to help fund these things we will run them we will use our manufacturer expertise we will help put customer products in these and if that's a semi-custom design like they have they have all of the means to do this they just need those customers and again the hinge Point had been they were really not a competitive Foundry and their process was behind as all of that shapes up things look very very interesting with all these Dynamics we're talking about politically the fact that you can't capacity from tsmc that there are companies out there like open AI even like Microsoft or others who would love to be at the Leading Edge and can't right they just can't because Apple's there in uh uh amds there uh nvidia's there right at tsmc you just you're just not going to get Leading Edge they're desperate for these things so if it's if it's even competitive like and that's the thing like I keep saying it doesn't even have to beat it just needs to be competitive there are customers who desperately need that today yeah and to your point about the risks of of of TSM and China I mean I find it ironic that Warren Buffett sold his TSM stock but he kept his Apple stock that seems like the risks are potentially similar okay we we got to wrap but before we do let's handicap some of the scenarios I put out a LinkedIn poll uh this week asking ahead of our talk here at Ben which the following outcomes uh was most likely uh Intel leads the market however we define leadership I just let the respondent Define leadership and I think we did a pretty good job here of roughly framing it that's number one Intel the the second one was Intel has to do a joint venture or sell the business um or three Intel ends up a distant third uh three4 of the of the whopping my 50 respondents said the outcome wouldn't be leadership um which one could infer is You Know Jack Welch's number one or number two position but Ben how would you respond to this poll would you say leadership as as we just defined it would you say it basically fail they got to shut it down or or or do a JV or H how would you handicap those three Alex bring them back up just so we can you know have pen review one more time marketers ship JV or sell the business or distant third after t pm and Samsung what would you say yeah so I think again right Market leadership as defined by what right I don't know if they need to be technologically leaders they're not going to be Revenue leaders I mean I don't see a scenario where they're bigger than tsmc right tsnc is going to pass 100 million in Revenue coming up this year most likely Intel's not right H how long would it take for Intel Foundry to be that big again probably never unless something drastic happens um so I so in terms of Revenue and or size scale probably not the the a comp with tsmc the JV side one you know again they've explored this like I said they are open to Capital coming in and funding foundaries with them to some degree UMC is this as well like they won't call it a JV but they've essentially done that you could imagine that that could be a plan B scenario with again the the caveat the government cannot allow right Intel Foundry to fail so I don't know how that works or what that means for our country or taxes or our debt but but they cannot let this fail right it's just too important to the National Security from a manufacturing standpoint so so somehow Foundry lives right in in in some capacity I I do though I do believe right and and this conviction just again comes from lots of things I've heard in the supply chain about about Samsung's challenges I do think that they will do what Pat said which has become the second largest Foundry by Revenue I don't think they'll pass dsmc but I do think if you look at Intel's Foundry Revenue road map over the next 10 years that to me is an achievable goal and it's a reasonable goal if they pass TC for some reason great I don't see that happening but but great but having the goal of second Foundry by Revenue which again could mean $40 billion of Foundry 50 right is give or take that seems reasonable between an Intel product and wa for scale customers at at the Leading Edge so I I think that's where will end up I don't know how long it's going to take but I think that's the most likely scenario with again like you said worst case scenario JVS and the government has to do something to make sure the foundary doesn't fail because it's too important yeah I would so based on the answer I would put you in the number one Camp because I would consider you know again Jack Welch you're number one or number two that's that's leadership uh so I I think that would firmly place place your answer in the in the number one category hopefully you're right um you know last topic I want to hit on is those manufacturing facilities that we showed earlier I think I counted six so that's that means well north of a hundred billion dollar to fund that so that's why I mean I really Sam alman's number caught my attention they're getting you money from the US government in the EU but you know let's call that what 20 billion you know so they got to pay for the other whatever 100 plus billion that it's going to need and uh so I just want to I want to close there and and just come back I know I've asked this question before but where does that cash come from you know that additional cash it's presumably got to come from their free cash flow right is that how does that play into your scenario yeah I mean they look they they can't fund it all by themselves I mean that's the reality right that that would drastically hit their gross margins in a way that that no one wants to see those gross margins decline um we know they're getting Chip back money we know another round of that's going to come we know that they're getting prepayments from customers whoever those are again I have no idea the sizes of that um they're going to need that collaborative effort of Revenue in what they call you know Dave Z or their CEO has called this their smart Capital strategy they're going need to keep using that right government um abilities to redistribute cash they they just can't do it on their own so knowing that it really comes down to who are those who are those customers that will prepay because that's what they're taking who are those customers that will continue to help fund who are those customers that like USC will put Capital co- Capital into some of these environments and then right what can they get from government agencies all of that's going to be necessary until this can really work itself out by itself which again I have to imagine that if they have a scenario where we do all of this right we look at the cash flow we look at the customers that way for scale they should make money right the Intel wants to grow Revenue they want to be extremely profitable again Foundry is a key a key part of that so they have to have models that work when all of this goes right and and and those are the things where I think they'll look at those those strategic Partnerships and again government Capital because like I said the government's not going to let them fail will continue to give them a good portion of any money that goes into it and again something creative like like you said like what Sam is doing becomes an interesting option and you'll see other other other government other Sovereign funds realize this drastic capacity issue that we have look for reasons to or ways to solve it and realize that Intel's a pretty good bet in a good position to help solve some of those those things going forward but strategic capital is still necessary and the other thought I've had is that you know the US government which is attacking the likes of Amazon not so much Microsoft but you know hey they may be next and uh uh Facebook and certainly Apple that maybe they maybe the government gets those companies in a headlock and says look we'll ease off a little bit but you got to throw some uh some money uh into the chip manufacturing way Ben we got to go thank you so much you got great depth of knowledge and really appreciate you coming on the program anytime I'm really glad to do it it's good seeing you again Dave yeah good seeing you okay that's it for now I want to thank Alex meerson and Ken schiffman on production and they run our podcast as well Kristen Martin and Cheryl Knight helped get the word out on social media and our newsletters and Rob HF is our editor-in chief over at silicon angle.com remember all these episodes are available as podcast just search breaking analysis podcast wherever you listen I publish each week on the cube research.com and silicon angle.com want to get in touch email me david. balante silicon angle.com or DM

me at D balante comment on our LinkedIn post and definitely check out et. they got great survey data in the Enterprise Tech business this is Dave bante for the CU research insights powered by ETR thanks for watching Everybody we'll see you next time on breaking analysis [Music]

2024-02-16 01:03

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