Fabless: Chip Companies That Design But Don't Manufacture

Building and running a chip factory takes an almost unimaginable amount of money and effort. A factory with cutting-edge, ultra-fine manufacturing processes can cost tens of billions of dollars, and it needs some of the most precise machines on Earth.

Now imagine if every chip company had to own a factory before it could make a chip. A small startup or a team of researchers could have a brilliant, innovative idea and still never get it out into the world.

So a smart division of labor emerged. Some companies skip the huge burden of building and maintaining factories. Instead, they pour all their talent and R&D money into designing groundbreaking chips that never existed before.

Once a fabless company finishes a detailed chip design on a computer screen, someone has to physically print it onto a silicon wafer (the thin round base that chips are made on). A company that makes chips only, following designs handed over by other companies, is called a foundry.

Fabless companies and foundries fit together like gears. The fabless company doesn't have to run or maintain factory equipment, so it can focus on planning high-performance chips for AI and smartphones. One catch: yield (the share of chips that come out working) is directly tied to the cost of each chip, so the two partners work closely together to manage it.

The foundry, in turn, doesn't have to brand and market its own chips. It can devote itself to pushing nanometer-scale manufacturing technology to the limit. That makes each side the ideal partner for the other.

The chip industry wasn't always split so cleanly between design and manufacturing. In the past, the mainstream was the integrated device manufacturer (IDM), a company that handled everything under one roof: planning, design, factory production, and final testing and packaging.

Then, starting in the 1980s, fabless design companies and manufacturing-only foundries began to appear. Later, the finest features on a chip shrank to a fraction of a thousandth of the width of a human hair. Factory costs shot up, and this split spread even faster. Still, IDMs that both design and manufacture chips are around today.

The brains inside the AI systems and smartphones everyone is excited about today mostly come from the meeting of two strengths: the agile planning of fabless companies that put all their creativity into design, and the unmatched manufacturing skill of advanced foundries.