Fabless chipmakers design and market semiconductors for smartphones, computers, medical devices, and many other electronic devices. They decide how to assemble and market the semiconductor chips but don’t fabricate (fab) them—hence they’re fabless. That task is outsourced to a foundry specializing in the highly sophisticated and capital-intensive work of producing them. Advanced chip designers, who hold the intellectual property (IP) for the chips but don’t produce them, are often given the moniker. Examples include Apple (AAPL) and Nvidia (NVDA). Many foundries are located in Taiwan and China, where skilled labor is less expensive and production costs are lower.

Key Takeaways

  • Semiconductors, or chips, are used in a vast range of devices, from smartphones to medical devices to wearable technology.
  • Fabless chipmakers don’t make the chips but outsource production to foundries and other outside manufacturers.
  • The fabless chip model developed in the 1980s when smaller chipmakers were left with a surplus of products in a tough-to-crack market.
  • Fabless companies are typically headquartered in areas where production would be more costly, while the foundries are located where labor costs are cheaper.

Evolution of the Semiconductor Industry

During the technology boom of the 1970s, the top semiconductor manufacturers had vertically integrated business models, designing, testing, and building the products they sold. Then, in the early 1980s, smaller manufacturers began to enter the marketplace, but strong barriers to entry meant that many of these companies were producing more chips than they could use. This surplus, combined with the continued growth of the semiconductor industry, led to the creation of the fabless business model.

The first foundry, Taiwan Semiconductor Manufacturing Company, came on board in 1987 and remains the largest independent manufacturer of silicon components in the world.

Global chip sales totaled $134.7 billion during the third quarter of 2023, which represents an increase of 6.3% compared with the second quarter of 2023 and 4.5% less than the third quarter of 2022.

Fabless Business Model: Pros and Cons

The fabless business model makes sense on several levels. Focusing on designing and developing makes it easier for specialized companies to try new ideas without dealing with the massive expense of manufacturing. The cost of setting up, running, and maintaining a foundry is immense, requiring an enormous initial investment. That’s not something many semiconductor designers can perhaps afford or want to spend money on.

Outsourcing manufacturing to a specialist third party allows companies to focus their resources on product development, customer service, and marketing. Other benefits of this business model include the ability to scale production and respond quickly to changes in demand without hiring or laying off staff.

Drawbacks could include over-reliance on suppliers, lack of control over hardware elements central to one’s business, and the risk of counterfeiting. As a company grows and builds its capital, one might think they’d find it worthwhile to bring manufacturing in-house. Evidently, companies are finding that’s not the case. The world’s biggest semiconductor companies continue to avoid an earlier era’s vertical integration in this sector, suggesting employing the fabless business mode is more profitable.

Those contracted by fabless chipmakers themselves outsource parts of their job. For example, Dutch semiconductor company ASML, a pioneer in extreme ultraviolet lithography, makes tools used by the Taiwan Semiconductor Manufacturing Company (TSMC) and other chipmakers.

Largest Fabless Chipmakers

The list of top 10 fabless chipmakers worldwide includes six U.S. companies: Qualcomm, Broadcom, Nvidia, AMD, Marvell, and MPS. The others are MediaTek, Novatek, Realtek, and Will Semiconductor. This list may change in order, but not its members, given the barriers to entry in this market. As MarketLine, the business intelligence and market research firm, notes, new entrants are unlikely soon due to the expense of entering this market.

Intel entered the foundry business in 2010 when it began selling its integrated circuits to the startup Achronix Semiconductor.

Global semiconductor sales reached a record high of $574.1 billion in 2022, according to the Semiconductor Industry Association. The World Semiconductor Trade Statistics (WSTS) organization reckons global industry sales will fall to around $520 billion in 2023 but then bounce back and hit new highs in 2024, when demand is expected to continue rising. MarketLine’s outlook is similar for 2024, but beyond that, its forecast is more tempered, with an anticipated compound-adjusted growth rate of 3.6% up until 2027, with particular strength in the U.S. market at 6.9%.

Who Is the Largest Fabless Chip Designer?

In the third quarter of 2023, Nvidia overtook Qualcomm as the highest-earning fabless chip designer. In recent years, it has been between these two companies and Broadcom.

Is TSMC a Fab or Foundry?

The Taiwan Semiconductor Manufacturing Company (TSMC) is an independent semiconductor manufacturing foundry, meaning it makes semiconductors for other companies. Its customers include Apple, Qualcomm, AMD, Broadcom, Nvidia, and Intel.

Is Apple a Fabless Company?

Yes, Apple outsources the manufacturing of its components to other companies, including TSMC. The iconic brand focuses on design and marketing. This plays to its strengths and has been determined by the company to be more cost-effective.

The Bottom Line

The fabless chip business model enables companies to design and sell semiconductors used in everything from smartphones to vehicles to medical devices without having to manufacture them. Fabrication is outsourced to third parties, often located in countries like Taiwan and China, where labor is cheaper, leaving the company to focus on what it does best and avoid the hefty costs of manufacturing.

Using suppliers can increase efficiency, flexibility, and scalability. That’s why many of the biggest semiconductor companies operate in this way.

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