3 Ways Outsourcing Manufacturing to Asia Helps American Economy

While the shift of semiconductor manufacturing to offshore locations is often criticized, it's important to recognize the necessity and advantages. For companies like Qualcomm, attempting to invest billions annually in constructing fabrication facilities could have jeopardized their survival.
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Introduction

Outsourcing semiconductor manufacturing to Asia has emerged as a strategic choice for American companies, offering a multitude of economic advantages that contribute to the growth and competitiveness of the American semiconductor industry.

“Real Men have fabs”

~Jerry Sanders, the Rolex-clad, Rolls Royce−driving brawler who founded AMD”

AMD’s founder, once famously stated, in a straightforward and politically incorrect manner, that true semiconductor powerhouses must have their own fabrication facilities. This assertion underscored the significance of maintaining control over integrated circuit (IC) manufacturing.

While Jerry Sanders served as CEO of AMD, it manufactured logic chips, such as processors for personal computers.

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Sanders vividly recalled the earlier days, harking back to Bob Noyce’s experiments at Fairchild’s lab. His argument for retaining AMD’s in-house manufacturing stemmed from a now outdated display of assertive bravado, a posture not aligning well with evolving business practices.

Traditional Silicon Valley CEOs persisted in asserting that maintaining an integrated approach, where chip fabrication and design were coupled, was necessary to avoid inefficiencies. However, the persistent integration of chip design and fabrication was more a result of culture than sound business reasoning.

With the exception of Intel and memory vendors, semiconductor companies that didn’t embrace the fabless or fab-light strategy faced ridicule. Process technology was increasingly seen as a commoditized aspect of the industry, no longer capable of delivering a substantial competitive edge. It became widely accepted that staying committed to the integrated device manufacturing path would inevitably lead to financial ruin. This became the prevailing wisdom.

Outsourcing semiconductor manufacturing to Asia is a common practice. It involves contracting with foundries in Taiwan, China, and Malaysia for fabrication processes. This allows American firms to concentrate on design, innovation, and core strengths. In this blog post, we’ll delve into three reasons why this benefits the American economy.

1. Cost Efficiency from outsourcing manufacturing

Outsourcing semiconductor manufacturing to Asia provides American companies with a significant cost advantage. Asian countries, particularly Taiwan and China, offer a lower cost of labor and operational expenses compared to the United States. Taiwan’s Semiconductor Manufacturing Company (TSMC), for instance, is renowned for its advanced manufacturing capabilities and cost efficiency. Many American semiconductor giants, including Apple, Qualcomm, and NVIDIA, leverage TSMC’s cost-effective production capabilities to manufacture high-quality products at a competitive price.

By reducing production costs, American companies can allocate their resources strategically. These savings can be redirected towards research, development, and innovation, enhancing their competitive edge in the global market. Ultimately, this cost efficiency ensures the sustainability and growth of the American semiconductor industry on a global scale.

Example: The success of Nvidia

In the contemporary landscape, Nvidia’s chips, primarily produced by TSMC (Taiwan Semiconductor Manufacturing Company), dominate advanced data centers. The decision to avoid building its own fabrication facility proves to be a strategic advantage.

During the initial startup phase, amassing the necessary funds(These days it takes upto 20B$ to make a logic fab) for such an endeavor would have been exceptionally challenging. Investing a couple of million dollars in chip designers working out of a Denny’s was already a risky venture. Committing over a hundred million dollars, equivalent to the cost of establishing a new fabrication facility at that time, would have pushed the limits even for Silicon Valley’s boldest investors.

At the early stages, Nvidia’s primary focus was on designing exceptional chips. Engaging in managing the manufacturing process would have stretched their resources and bandwidth thin, potentially hindering their ability to invest in building a robust software ecosystem, a critical component of their success story.

Read more: Bankruptcy to Trillion-Dollar Company: Story of Nvidia

2. Focus on Core Competencies and Innovation by outsourcing manufacturing

Outsourcing semiconductor manufacturing enables American companies to concentrate on their core competencies, such as design, engineering, and innovation.

By leveraging the expertise and specialized capabilities of Asian foundries, American companies can accelerate the development of cutting-edge technologies. This specialization fosters a more efficient and innovative industry, driving economic growth and creating high-value intellectual property that strengthens the American economy.

Example: The Company of Quality Communications

Qualcomm is a leader in mobile chipset design for smartphones and devices. They outsource much of their manufacturing to TSMC and Samsung, focusing on core expertise: chipset design. This strategic decision helps them allocate resources for innovation. Collaborating with top foundries ensures their chipsets are at the forefront, advancing mobile tech and sustaining a key position in the market.

The prospect of establishing their own fabrication facilities was contemplated by Qualcomm multiple times. However, given the immense costs and complexities associated with such an endeavor, the company consistently chose to refrain from it. Thanks to strategic partnerships with companies like TSMC and Samsung, which were willing to handle chip production, Qualcomm’s engineers were empowered to concentrate on their strengths—effectively managing spectrum and excelling in semiconductor design.

3. The Need for Speed by Outsourcing Manufacturing

In the realm of technology, time is of the essence. The demand for faster and more efficient devices constantly drives the need for innovation and accelerated production. Semiconductor manufacturing, however, is a highly intricate and time-consuming process. The Integrated Device Manufacturer (IDM) model, where a company both designs and manufactures its chips, proved to be insufficient in meeting the rapidly evolving demands of the tech industry.

The traditional IDM model often slowed down innovation due to the time and resources required for both designing and manufacturing. Moreover, keeping pace with advancements was challenging, hindering profitability for a single company to sustainably operate under this model. This predicament propelled the industry towards a strategic shift: outsourcing semiconductor manufacturing to specialized foundries in Asia.

Example: Apple

Apple Inc. is a prime example of an American company that has effectively leveraged fabless semiconductor manufacturing to stay at the forefront of technology, specifically in the context of the iPhone, one of their flagship products.

Apple designs its own custom system-on-chip (SoC) for the iPhone, iPad, and other devices. This SoC, known as the A-series chip, integrates a variety of components including the central processing unit (CPU), graphics processing unit (GPU), neural engine, and other specialized hardware for performance, efficiency, and AI tasks. The A-series chips are a critical component of the iPhone’s performance and overall user experience.

For many years, Apple collaborated with different manufacturing partners, including Samsung and TSMC, to fabricate their A-series chips. However, since around 2016, Apple has primarily partnered with TSMC for the manufacturing of their latest A-series chips.

TSMC, being a leading semiconductor foundry, has been at the forefront of semiconductor manufacturing technology, consistently pushing the boundaries of Moore’s Law by developing and implementing advanced fabrication processes. Apple’s collaboration with TSMC allows them to benefit from TSMC’s expertise in manufacturing and advanced semiconductor processes.

The close partnership with TSMC enables Apple to access TSMC’s rapid advancements in semiconductor technology. This means that Apple can quickly adopt new manufacturing processes and incorporate them into the design of their A-series chips. This agility allows Apple to release new iPhone models with the latest chip technology on a regular and predictable schedule, in line with Moore’s Law predictions.

Conclusion:

While the shift of semiconductor manufacturing to offshore locations is often criticized, it’s important to recognize the necessity and advantages. For companies like Qualcomm, attempting to invest billions annually in constructing fabrication facilities could have jeopardized their survival.

Qualcomm, under the leadership of Jacobs and its skilled engineers, excelled at optimizing data transmission and creating sophisticated chips to interpret these signals.

Similar to Nvidia’s experience, not being burdened with the role of semiconductor manufacturing experts proved beneficial.

References:

[1] Chip war by Chris Miller.

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