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Intel Officially Loses Its Manufacturing Lead

Ashraf Eassa, The Motley Fool

DigiTimes just published an overview of the cutting-edge chip manufacturing landscape. In the overview, the company says that Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is set to start mass production on its 7-nanometer chip manufacturing process in the second quarter of 2018, with an enhanced version of that technology going into production in early 2019.

Newer generation manufacturing technologies allow chip makers to cram more features and drive up performance compared to previous technologies; advancements here are the lifeblood of the computing industry.

An Intel Core 2 Extreme processor.

Image source: Intel.

By contrast, DigiTimes reports that chip giant Intel (NASDAQ: INTC), which had long enjoyed a comfortable lead in chip manufacturing technology over other chip manufacturers, won't go into production on its 10-nanometer technology (which is roughly comparable to TSMC's 7-nanometer technology) until the second half of 2018, "when TSMC's more advanced 7nm process will be fully in volume production."

At this point, I think it's safe to say that Intel has lost its manufacturing leadership position to TSMC. Let's go over two key implications of this.

1. Increased competitive pressure for Intel

Intel's advantage in manufacturing technology naturally translated into better products. Faster, more efficient manufacturing technology meant faster chips, and denser manufacturing technology meant the company could cram more features into a given space than the competition could, potentially affording it superior margins or giving it the ability to price more aggressively while maintaining high gross profit margins.

Since most of Intel's competitors rely on third-party chip manufacturing companies like TSMC to build their products, TSMC's strengthened technology position should translate into better products from TSMC's customers -- the products that'll go head to head with Intel's products in the marketplace.

Product competitiveness isn't determined solely by manufacturing technology, but now that TSMC has caught up with Intel (and actually seems to be a little ahead), Intel has fewer tools in its arsenal to try to build the world's best products.

2. Contract chip manufacturing dreams shattered

Intel has been talking about trying to enter the contract chip manufacturing market in a bid to compete directly with the likes of TSMC for quite some time, though the business itself has yet to generate material revenue. The company's pitch has typically been along the lines of: "We have superior technology than the competition, which attracts potential customers."

Superior technology alone isn't enough to secure contract chip manufacturing orders -- the ease of use of that technology, the depth and breadth of a manufacturer's intellectual property portfolio, and the manufacturer's track record are all critical to success, here. However, with superior technology, Intel at least had some hope that it could begin to build a solid foundation.

Now that Intel doesn't appear to have a technology advantage, I don't see any reason a potential customer would risk their business on an unproven company that managed to turn a multiyear technology lead into parity at best, and at worst, a slight laggard position.

Considering these dynamics, coupled with the fact that Intel hasn't announced any new customers for its contract manufacturing division in quite a while, I think its efforts to try to become a contract manufacturer will fail spectacularly. If Intel needs to start cutting costs, expect this division to be among the first casualties. 

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.