Globalfoundries CEO Sees Investment in Client Supply Lock

Globalfoundries Inc. Chief Executive Officer Ajit Manocha said surging demand for advanced smartphone parts is stepping up pressure on semiconductor makers to team up with contract chip manufacturers to ensure adequate supply.

The shrinking number of foundries -- manufacturers that work for different chipmakers -- and a jump in costs will lead to more investments and tie-ups between companies such as Globalfoundries and their customers, he said. Though his company doesn’t need the money, Manocha said he’s open to customers having “skin in the game.”

Globalfoundries is one of the few manufacturers able to spend the billions of dollars required to build factories that can churn out the processors and communications chips needed to run the newest handsets, he said. As that process becomes even more expensive, financial commitments and closer cooperation from chipmakers looking to lock in a steady flow of components will replace the “customer-supplier model,” he said.

“We need to make sure we share the losses and we share the gains,” said Manocha, who took over as chief executive last June. “There are half a dozen different ways for this collaborative model I envision.”

Manocha, whose customers include Qualcomm Inc. (QCOM) and Broadcom Corp., is setting his stall out in a market where companies have suffered shortfalls in supply that have crimped earnings. In June, Qualcomm CEO Paul Jacobs said his company was prepared to write “big checks” to make sure that didn’t happen again. Manocha declined to comment on his customers or negotiations under way.

Foundries’ Fortunes

Highlighting the increasing importance of companies such as Globalfoundries and larger rival Taiwan Semiconductor Manufacturing Co. (2330), foundry industry sales will jump 15.9 percent this year from last year’s $26.5 billion, even as total chip industry sales decline, according to market researcher IHS.

Globalfoundries, based in Milpitas, California, was created in 2009 when the investment arm of the government of Abu Dhabi bought the manufacturing operations of Advanced Micro Devices Inc. and then merged them with another purchase, Singapore’s Chartered Semiconductor. The company is closely held. While a sale of shares to the public is an option in the future, there are no current plans, Manocha said.

Reputation Repair

While Manocha’s prediction for a coming wave of investments, joint ventures and guaranteed-supply agreements across the industry is likely to be borne out, his company needs to keep improving its performance after past slip-ups made customers leery of giving it too may orders, said Len Jelinek, an analyst at IHS.

“Their reputation with some of their clients is stressed,” Jelinek said. “They have to come out from under the cloak that they are living under.”

In response to such concerns, Manocha said he replaced the management of the company’s plant in Dresden, Germany, after they were slow to transition operations from supplying only AMD parts to catering to multiple customers. That process also caused delays in production improvements and led to shortages of AMD processors last year.

“Today we are meeting or exceeding every single customer requirement,” he said. “We have caught up on the technology leadership we lost.”

Globalfoundries’ Dresden and Singapore operations are now profitable, he said. Its new plant in New York state is producing test chips and hasn’t yet begun to ship for revenue. Plans to build another site in Abu Dhabi are on hold, he said.

“The question is when, not if,” he said. “But that when hasn’t been decided yet.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net;

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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