TSMC says single-customer fabs make sense

7/25/2012 11:25 AM EDT

This doesn't make a lot of sense to me, other than TSMC trying to show that it's being responsive to the issue of tight 28-nm capacity. How could it make sense for TSMC to maintain a Qualcomm fab next door to an Nvidia fab and not retain the ability to run some wafer lots at both facilities in the event that one of these companies encounters a lot more demand than the other at, say, the 20-nm node? How would it make sense for TSMC to say to Qualcomm, "Sorry, your fab is full," even though we have plenty of capacity in other dedicated 20-nm fabs, we can't use it because those fabs are dedicated to single customers.

7/25/2012 12:03 PM EDT

One would expect that before TSMC dedicates any facility to a single customer regardless of its location, it would secure long-term contracts with said customer. From the customer's standpoint, it might make sense to contract for a dedicated fab that handles 80% or less of the customer's expected volume, and then purchase any additional needs from the general-availability fab(s). If such a business case was presented, TSMC might consider building a dedicated facility wherever it made most sense for the customer, e.g., close to customer's main board assembly operation(s).

7/25/2012 12:12 PM EDT

The cost of a 28/20/14nm fab probably is around 3~8B$. The annual revenues of QCom/Nvidia is less than 10B. So I feel the only company for which this idea makes sense is Apple.

7/25/2012 12:26 PM EDT

The cost of leading-edge fabs is astronomical and growing. But this is the business that TSMC is in: laying out that capital with the expectation that they will get it back and reap a healthy return on investment when the fab ramps. If TSMC starts building dedicated fabs, presumably with money up front from the customers that they will be dedicated too, doesn't that represent a fundamental change to the foundry business model? What happens if one of the dedicated customers lands in real financial trouble and needs to liquidate assets? Could it sell its stake in a fab operated by TSMC?

7/25/2012 12:43 PM EDT

Dedicating one fab to one customer model can lead to retain high volume customers but this model is susceptible to fluctuations in the demand from customer. So, running fab for multiple customer makes more sense to me.

7/25/2012 12:56 PM EDT

They better say they want to work for Qualcomm. I do not think it is a model they can sustain since a single customer will put risks on their bottomline with cyclical changes we notice in the business.

7/25/2012 2:51 PM EDT

I wonder if this opens up the risk that the fabs may end up becoming unique in some way that is optimized for the big customer. So let's say TSMC's Qualcomm fab get's adjustments one way and Apples' the other. They it makes it harder for them to adjust to run one companies waffers on anothers fab. Sort of a pandora's box.

7/25/2012 3:33 PM EDT

Put 2 + 2 together and it equals Apple in this case. Here's the logic:

First mathematical term: capacity buy
Second mathematical term: capital to buy it

and the only answer is Apple that has both. TSMC and Samsung are arch-rivals in foundry business. Likewise I have to think that Apple sees the conflict of interest in sourcing parts and litigating against the same company, Samsung. Also, knowing Apple's Supply Chain capacity buyouts, if they want to plunk money down to buy it they want an iron clad guarantee they will get what they pay for, no questions asked, and that it will go into a place where there are no channel conflicts.

I think before 2012 is done you will have an announcement about a dedicated Apple fab operated by TSMC.

7/25/2012 3:53 PM EDT

This sounds more like a joint venture than a foundry agreement. Apple provides the capitol, TSMC provides the process IP and the manpower. Apple gets 100% of the product, TSMC gets ??? dollars per wafer. Would it be possible for Apple to make a similar joint venture with Intel, or GF, or IBM, or ??? I don't see why the partner has to be a foundry at all, an IDM might make more sense.

7/25/2012 8:33 PM EDT

Whether it make sense depends upon the details of the deal.

For the customer, the question is "Can we get enough components to meet our production requirements?" No one wants to leave money on the table because they simply can't build as many devices as their customers want to buy.

For TMSC, the question is "Can we in fact meet the customer's needs?" Depending upon the volume the customer requires, the answer may be "Yes, if we dedicate a fab to them."

The question is what "dedicated" means. Current leading edge fabs are fantastically expensive, to the point where very few companies have their own. And the only way you make money is to have the fab producing in volume all the time.

So if I'm TMSC, I'm deciding whether to dedicate a fab, and which fab to dedicate, based on the customer order. It would have to be a hard commitment by someone like Apple to get me to do it. And even then, "dedicated" in practice will mean "The customer has first dibs on capacity, and the fab will meet their orders before it does anything else. But if the fab has any leftover capacity *after* filling the customer's order, it will be allocated to other production. It is too expensive to have any capacity idle."

I think a joint venture where a major customer like Apple puts up a chunk of the financing needed to *build* a fab is a possibility, if volume demands are great enough a new fab has to be built. But initially, I see this as simply a way of allocating existing capacity to reassure major customers that they'll get what they order. If I were TMSC, I'd think very hard about whether I'd do a joint venture to build new capacity, and leave myself that indebted to that customer. If the volume I'm handling is great enough I *need* to expand, I might decide I could do so on my own.

7/26/2012 6:45 AM EDT

Of course it may be that Apple is saying a dedicated fab along the lines mentioned by DMcCunney is part of the terms of conditions of making Apple processors.

And that is what is putting some of these thoughts to top-of-mind with Morris Chang.

7/26/2012 10:47 AM EDT

I agree with peter.clarke. Whow knows who forced and who gave Morris Chang such idea to think that single customer fab would be benefitial. I strongly believe that Apple and/or Qualcomm had their word in it.
Other thing to note is that TMSC runs this monopoly of the chip manufacturing pretty much, so they can do whatever they want. Whow are they going to lose their business from?

7/26/2012 3:53 PM EDT

Like in all business, TSMC needs to plan its capacity according to customers' and its own forecast. The good thing about foundry model is each individual customer does not need to forecast accurately as long as the foundry can forecast a rough aggregate demand to plan for its expansion. In this model, customers don't need to risk any capital. The foundry is taking all the financial risk for building the fab because it believes (with some customer inputs) the demand will be there when the fab is on line 18 months after fab construction.

Qualcomm complains TSMC didn't have enough capacity when it couldn't forecast the demand of its own business.

TSMC of course can commit a whole foundry to one customer as long as that customer commits up front to buy, say 90% of the capacity, lots of wafers over 3 or more years. Or, the customer can chip in part or all of the fab cost. The fab will only use the fab equipments for its own designs, instead of meeting the needs for 20 other customers. The benefit is better process optimization of the processes, lower cost of the fab, and faster to production.

The whole idea is simple. The issue is if there will be any customer willing to commit up front for TSMC to remove that fab the chance to make any profit from other customers.

7/26/2012 10:27 PM EDT

I think this is not new idea. Back in 2011 it was widely rumored that samsung was building apple's chips at a dedicated fab in the US, so a single customer fab may already exist, and trying to copy samsung may be what put the idea into Morris Chang head.

7/27/2012 2:32 AM EDT

I think that Samsung's Austin FAB makes chips for Apple. I have heard about use it or lose it, but customers doesn't like the idea. They don't want to put down the capital. Specially when they can choose between TSMC, GF, UMC & Samsung.
It always makes sense to keep a 2nd source.

7/27/2012 3:54 AM EDT

Single customer fab must have that customer sign exclusive foundry agreement. After dedicating a fab, to have them go elsewhere is catastrophic.