We recently had an interesting conversation with a Business Insider reporter Rosalie Chan on tech giants designing their own silicon and potentially moving the manufacturing back to the US. The full article is available only to Business Insider subscribers, but we feel it’s an interesting topic, and want to share our thoughts.
Tech giants designing their own chips is nothing new, but the efforts have significantly accelerated in recent years. Apple is the best example in consumer electronics, famously known for the A-series smartphone SoC and the M1 SoC for Macbook more recently. In the cloud space, Google started early with its TPU (Tensor Processing Unit), but Amazon is the one pushing the hardest and has a wide range of internally designed processors available, including Graviton for general-purpose ARM CPU, Trainium, and Inferentia for Machine Learning accelerator, and Nitro for DPU (Data Processing Unit). Other large cloud providers, including Microsoft, Alibaba, and Tencent, are all working on their own processors in one form or another.
So why are they doing this? Saving cost may be one reason, but we doubt it is an important driver. Processor design is a costly endeavor, especially for the leading-edge chips like the ones mentioned above. According to the leading EDA company Synopsys, the design cost alone could add up to hundreds of million dollars. The companies designing the chips still have to pay the foundry for the actual chips. So from a cost perspective, the money you save by designing your own chip is the gross profit of your prior processor provider minus the money you spent in R&D developing it. The math will vary for different companies, but we doubt it’ll meaningfully change the margin profile for any of these companies.
The more important consideration is to gain strategic advantage for the core product, in our opinion. Apple is again the best example of that. By designing its own SoC, Apple could better integrate and optimize across software and hardware that no competitors can do, which gives them a significant advantage in user experience. Huawei was another example. It uses Android OS and doesn’t have total control of the software. But before the US sanction, it could still leverage the strong HiSilion Kirin SoC to gain the upper hand in the premium smartphone market vs. other Android smartphone providers relying solely on Qualcomm and MediaTek. It is a similar story in the cloud. Google developed TPU to run certain machine learning models in the Google Cloud Platform to differentiate its IaaS. Amazon develops all these processors to offer IaaS cheaper than anyone else and differentiate that way, the classic Amazon “your margin is my opportunity” playbook. None of these companies are in the chip design business for money. It’s all about making the core products better and more competitive.
However, almost all these processors we talked about are still manufactured outside of the US, mainly by TSMC based in Taiwan. Moving the manufacturing back to the US is much more challenging. The reason is that there is simply no leading-edge foundry that can do that. Even Intel, which has a foundry business, still must rely on TSMC in the near term to stay competitive. Intel plans to catch up to TSMC in the next few years by introducing 4 new process nodes in 5 years, an extremely aggressive target by any standard. This is a potential issue especially given the perceived geopolitical risk and recent supply chain disruption. We understand the geopolitical point as much as the next person and can’t offer much insight there. The supply chain issue will get resolved eventually, but it takes time. Bottom line, moving the leading-edge manufacturing back to the US is easier said than done.
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