Intel Goes Deeper Into Its Own Supply Chain

Intel Corp. (Nasdaq: INTC) isn't waiting around for the development of new technologies that would accelerate the introduction of larger semiconductor wafers and thereby dramatically reduce its operating costs. Waiting for others to act is not something the world's leading semiconductor company does. It isn't hesitant to write large checks to assure its own success, as demonstrated by a transaction announced yesterday with ASML Holding NV.

Intel said that it will invest about $4.1 billion in ASML, one of the world's leading manufacturers of equipment for the IC market, to "assist in accelerating the development and delivery of 450-mm manufacturing tools" and extreme ultraviolet lithography.

Don't fret so much over the technology or terminologies being bandied about in the transaction. Dylan McGrath, my colleague at EE Times, has done an excellent job of explaining what this means for the technology sector. What's more important for the electronics procurement supply chain community is that, put simply, Intel is tired of waiting around for the chip equipment market to solve problems associated with next-generation manufacturing.

Intel is teaming up with its own supplier to achieve a goal that company executives say is critical to its continued success. It is set to acquire a stake as large as 15 percent in ASML and to fund R&D there to the tune of $1 billion. Intel says this will help eliminate impediments to the development of next-generation technology and eventually will slash its own production costs.

Competitors should be quaking in their boots. As many observers know, Intel's strongest weapon in any of its market segments is the internal manufacturing structure it has maintained while rivals have outsourced production. The company is one of a shrinking minority of semiconductor enterprises that still run their own fabs. Along with Samsung Electronics Co. Ltd. (Korea: SEC), it is one of an even smaller group that can afford to spend billions on a new fabrication plant. By supporting ASML, Intel is hoping to put additional miles between it and the competition.

Brian Krzanich, Intel's chief operating officer, summarized the strategy in a press release announcing the transaction:

Productivity improvements driven by enhanced wafer manufacturing technologies, especially larger silicon wafers and enhanced lithography technologies with EUV are direct enablers of Moore's Law, which delivers significant economic benefits to consumers.
The transition from one wafer size to the next has historically delivered a 30 to 40 percent reduction in die cost and we expect the shift from today's standard 300-mm wafers to larger 450-mm wafers to offer similar benefits. The faster we do this, the sooner we can gain the benefit of productivity improvements, which creates tremendous value for customers and shareholders.

Just one more side note here: ASML realized it couldn't continue to shoulder the huge development costs of this equipment alone as the pool of buyers shrank. According to the Intel press release, ASML intends to sell "up to a 25 percent aggregate stake in the company (on a post-transaction basis) to Intel and other semiconductor manufacturers in this program."

The company is reported to be in talks with Samsung and Taiwan Semiconductor Manufacturing Co. (TSMC) (NYSE: TSM). Neither Samsung nor TSMC can afford to pass up this opportunity. Samsung, the world's second-biggest chip vendor, has a side business as a contract wafer provider to companies like Apple Inc. (Nasdaq: AAPL). It is also angling to overtake Intel as the world's biggest semiconductor vendor. TSMC is by far the world's biggest contract semiconductor wafer provider, but Intel and Samsung are both partners and rivals with the company. To stay competitive, these three companies must indirectly partner with one another through suppliers like ASML. They can't afford to fall behind in process technology.

The big winner here is ASML. It has turned customers into investors. You can't beat that.