Asia chip windfall preludes tech’s next challenge

Asia’s semiconductor windfall is a prelude to bigger challenges. Shares of Taiwan Semiconductor Manufacturing and South Korea’s Samsung Electronics surged on hopes that Intel may outsource production. Still, $209 billion Intel’s woes show how costly it is to make cutting-edge chips.

Since announcing its next generation of processor chips were six months behind schedule last week, the U.S. technology firm led by Bob Swan has lost nearly a fifth of its market value. It’s an embarrassing delay and may result in the company losing market share to technology rivals like California-based Advanced Micro Devices.

Intel’s stumble will have ripple effects across Asia’s supply chains too. The company is one of the few that manufactures its semiconductors in-house, rather than outsource to a contract-chipmaker as AMD, Qualcomm and Apple do. Investors are betting Intel will soon make the same choice as its peers. Shares of the world’s top contract chipmaker, TSMC, and Samsung are up by some 10% since last week. The former is now worth $385 billion – nearly 30% of Taiwan’s benchmark stock index.

The rally looks premature. If Intel outsources its entire chip business, that would add 20% in annual sales to the $65 billion contract chipmaking market, Bernstein analysts reckon. Most of the spoils would go to the Asian pair as the duo specialise in advanced semiconductors. Still, any transition by Intel is likely to take years and, assuming TSMC wins 60% of the extra business, it might add just 2 or 3% to the Taiwanese group’s top line until 2026, Bernstein calculates.

Intel’s problems reflect how expensive it is to make smaller and more powerful chips. The market has shrunk from more than nine manufacturers to just two over the past decade but justifying the rising up-front costs of building new plants and equipment to stay-ahead of rivals is getting harder. TSMC’s key customer, Apple, for instance, is the only smartphone maker expected to adopt so-called 3-nanometre chip technology – which may require at least $23 billion in investment from the chipmaker, according to Taiwan’s DigiTimes. Finding buyers might be the next challenge.