Intel Corp will develop and make its low-cost Atom-based chips with Taiwan's TSMC for a range of electronic devices, marking a shift in Intel's strategy while helping both companies expand into new markets amid a deepening global recession.
Intel has long insisted on making its own microprocessors, but is now prompted to bring in partners to help it tackle new markets and expand its product range. Analysts had speculated Intel would resort to more outsourcing to trim costs as demand dries up.
The world's top chip maker and biggest producer of made-to-order chips, Intel said on Monday it plans to put its Atom -- the brains of ultra-small laptops -- on single chips that behave like an entire computer, a computer on a chip.
But Intel stressed it will not transfer its highly prized manufacturing process technology to TSMC.
It will, however, let the contract chip maker make newly developed Atom-based chips for gadgets such as smartphones, set-top boxes and cameras, boosting volumes at the Taiwanese foundry at a time sales are shrinking in a downturn.
Neither company would divulge targets, specific products, or timeframes under their memorandum of understanding. Some analysts said Intel might be trying TSMC out before embarking on more full-fledged outsourcing.
For them to come to the decision to outsource manufacturing of any product that they design is a monumental change in their mindset, said Patrick Wang, a Wedbush analyst. Intel could be testing the waters with TSMC.
Intel has wanted to expand beyond the PC into the rapidly shifting world of gadgets but it has in the past been frustrated in its efforts, PiperJaffray analysts wrote in a note issued Monday afternoon.
Shares of Intel fell 3.38 percent to close at $12.31 on Nasdaq, in line with the overall market slump.
Analysts said investors were holding off because of the lack of details. Piper Jaffray estimates Intel and TSMC won't begin to take in revenue from their collaboration till 2010.
Hans Mosesmann, an analyst with Raymond James, agreed: We won't know the ramifications of this as a successful decision or not until 2010, 2011.
Global chip sales plummeted 29 percent in January to $15.3 billion, according to the Semiconductor Industry Association.
Longer term, analysts said Intel -- lacking the requisite in-house technology to stake out a big footprint in fast-moving consumer electronics -- was making the right decision.
Roping in TSMC could open new markets for Intel much more quickly than the chip giant could do on its own. And the agreement validated TSMC's leading portfolio of intellectual property and manufacturing capability, they said.
It's the right choice. Intel has to bow to the reality that they're not good at everything, Mosesmann said.
It's more of an acknowledgment that the way we (Intel) hoped to do this is not going to work out.
Intel is spending heavily to shift its technology into next-generation 32-nanometer manufacturing, while simultaneously trying to shave costs to preserve margins.
The company plans to shut plants in Malaysia and the Philippines and its one surviving factory in Silicon Valley, cutting as many as 6,000 jobs. At the same time, it plans to spend $7 billion over two years to build next-generation, 32-nanometer chip manufacturing capacity.
Intel has maintained it will manufacture its own microprocessors, though it had previously outsourced some processes, including chipsets and wireless devices, to TSMC and other foundries.
But as the cost of chip manufacturing has skyrocketed, many peers, including graphics chip maker Nvidia, have migrated to fabless or fab-lite strategies.
Distant rival Advanced Micro Devices Inc is spinning off its own foundry company.
The Intel-TSMC deal, if nothing else, shows that there is still demand for foundries, said Doug Grose, Senior Vice President of Manufacturing and Supply Chain for AMD and incoming CEO of the new foundry company.
The announcement today supports the strength of the foundry market, he said. To me, it validates the market that we're headed into.
The deal is also new for Intel, said spokesman Chuck Mulloy. Manufacturing an Intel core other than at Intel is something that has not happened before. For the first time, Intel is transferring the design technology to a third party.
(Reporting by Janet Kornblum; Editing by Edwin Chan, Richard Chang, Gary Hill)
(Visit http://blogs.reuters.com/mediafile/ for more coverage at the Reuters MediaFile blog)