In the Chips: Forging Smart Alliances
In the $21.5 billion chip-manufacturing business, size matters. That's why chipmakers-for-hire that don't have huge volumes of business are banding together to gain economies of scale. The leading example of this kind of collaboration is the Common Platform Alliance, a venture of IBM (IBM), Korea's Samsung, and Singapore's Chartered Semiconductor.
The alliance is a nice thing for IBM and Samsung, since manufacturing chips for other companies makes up just a small part of their overall revenues. But it's vital for Chartered, which does nothing else. "If we were doing this by ourselves, we would spend at least three times as much, and we'd run a very high risk," says Chartered Chief Executive Chia Song Hwee. "If we ran into difficulty, we'd have nobody to work with on a solution."
The positives for Chartered are plain to see: Five years ago, when it first aligned with IBM, Chartered's annual revenues were just $449 million, with a $417 million loss. "We were behind on technology and losing customers because of our financial situation. It was not a pretty picture," says Chia. Last year, in contrast, the company pulled in $1.414 billion in revenues and made a profit of $67 million. Chartered was the No. 3 contract chip manufacturer in the world last year, behind Taiwanese giants TSMC and UMC, according to market researcher Gartner (IT).
Still, Chartered's market share of 7% was dwarfed by TSMC's 46% and UMC's 17%. IBM was in fifth place, with about 4%, and Samsung wasn't even ranked. Also, last month, Chartered reported its first loss in seven quarters, due to weak demand. All this helps explain why the three companies chose to band together and share resources (see BusinessWeek.com, 8/20/07, "Microsoft and Cisco: Product Promises").
"Leading-Edge Business Model"
Chip manufacturing is such a competitive and costly business that Gartner analyst Bryan Lewis believes the Common Platform Alliance model should be adopted by other second- and third-tier chipmakers as a survival strategy. "I do think we'll see other alliances develop over time that will move in this direction, but this is a leading-edge business model, and it will take time for others to copy it," says Lewis. He believes the alliance could eventually pose a threat to TSMC and UMC.
The alliance partners use IBM's cutting-edge chip plant in East Fishkill, N.Y., as a laboratory for trying out new manufacturing processes. Chipmaking in so-called fabs is a complex business—as much R&D as manufacturing. Once new processes are tried out and codified at the IBM plant, they're transplanted to Chartered and Samsung factories, where the ramp-up process continues. (Samsung joined the alliance in 2004.)
By having three teams of scientists and engineers tinkering with the processes in three locations, bugs are discovered—and fixes found—more quickly. "One of the benefits we hadn't anticipated is that when we introduce new technology, because of the collaboration, we're able to bring the fabs up to a productive and profitable level probably twice as fast as before," says William Zeitler, general manager of IBM's Systems & Technologies Group.
At first the three partners simply shared sophisticated, detailed technologies and processes, but more recently they began to share manufacturing capacity as well. If one of the three can't handle all the orders it has for a part from a particular customer, some of the work can be shifted to a partner's plant.
Security and Flexibility
The unusual alliance also makes it easy for customers to set up dual-source or even tri-source arrangements. Customers like the security and bargaining leverage that comes with having more than one source for a chip. So the fact that these three companies can all manufacture a chip in exactly the same way is attractive to customers.
That's something TSMC and UMC can't offer. Late last year mobile-phone-chip specialist Qualcomm announced that it would order parts from all three Common Platform Alliance partners. The processor for Microsoft's (MSFT) Xbox 360 video game console is made by IBM and Chartered.
The three alliance partners have to accept the fact that they have given up their ability to differentiate themselves based on basic manufacturing technologies and prices. Of course, when they compete with each other for business, they can still price differently, market imaginatively, and offer additional services or benefits.
Partnerships like this are complex to manage. UMC was IBM's original manufacturing partner, but it dropped out in 2002 when it disagreed with a technology choice IBM made—a bet by IBM that turned out to be wrong. IBM researchers had to scramble to come up with an alternative. UMC officials declined to comment about the breakup.
UMC's pullout gave Chia pause, but he did his due diligence on IBM and decided that its technology was sound and that its strategy complemented Chartered's. Since then the two companies have been in sync. "Collaboration is like marriage. You have to manage it," says Chia. "The key thing is having the right mindset to work together."