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For Chip Makers, the Next Battle Is in Smartphones

Ashlee Vance|The New York Times
Monday, 22 Feb 2010 | 11:02 AM ET

The semiconductor industry has long been a game for titans.

The going rate for a state-of-the-art chip factory is about $3 billion. The plants typically take years to build. And the microscopic size of chip circuitry requires engineering that practically defies the laws of physics.

Models show Samsung Electronics Co's Android smartphones during the unveiling ceremony on February 4, 2010 in Seoul, South Korea.
Getty Images
Models show Samsung Electronics Co's Android smartphones during the unveiling ceremony on February 4, 2010 in Seoul, South Korea.

Over the decades, legions of companies have found themselves reeling, even wiped out financially, from trying to produce some of the most complex objects made by humans for the lowest possible price.

Now, the chip wars are about to become even more bloody. In this next phase, the manufacturers will be fighting to supply the silicon for one of the fastest-growing segments of computing: smartphones, tiny laptops and tablet-style devices.

The fight pits several big chip companies — each trying to put its own stamp on the same basic design for mobile chips — against Intel, the dominant maker of PC chips, which is using an entirely different design to enter a market segment in which it has a minuscule presence.

Consumers are likely to benefit from the battle, which should increase competition and innovation, according to industry players. But it will be costly to the chip manufacturers involved.

“I worry about that,” said Ian Drew, an executive vice president at ARM Holdings, which owns the rights to the core chip design used in most smartphones and licenses that technology to manufacturers. “But ultimately, these chip makers are all pushing each other, and if one falls over, there are still two or three left.”

Intel , based in Santa Clara, Calif., has long been held up as the gold standard when it comes to ultra-efficient, advanced chip manufacturing plants. The company is the last mainstream chip maker to both design and build its own products, which go into the vast majority of the PCs and servers sold each year.

Most other chips, for items as diverse as cars and printers, are built by a group of contract manufacturers, based primarily in Asia, to meet the specifications of other companies that design and market them. Traditionally, these companies, known as foundries, have trailed Intel in terms of manufacturing technology and have handled chips with simpler designs.

But with mobile technology, an expensive race is on to build smaller chips that consume less power, run faster and cost less than products made at older factories.

For example, GlobalFoundries plans to start making chips this year in Dresden, Germany, at what is arguably the most advanced chip factory ever built. The initial chips coming out of the plant will make their way into smartphones and tabletlike devices rather than mainstream computers.

“The first one out there with these types of products is really the one that wins in the marketplace,” said Jim Ballingall, vice president for marketing at GlobalFoundries. “This is a game changer.”

The company, a new player in the contract chip-making business, was formed last year when Advanced Micro Devices, Intel’s main rival in the PC chip market, spun off its manufacturing operations. GlobalFoundries, based in Sunnyvale, Calif., has been helped by close to $10 billion in current and promised investments from the government of Abu Dhabi.

The vast resources at GlobalFoundries’ disposal have put pressure on companies like Taiwan Semiconductor Manufacturing, United Microelectronics and Samsung Electronics, which also make smartphone chips. The message from GlobalFoundries is clear: as the newcomer in the market, it will spend what it takes to pull business away from these rivals.

At the same time, Apple, Nvidia and Qualcomm are designing their own takes on ARM-based mobile chips that will be made by the contract foundries. Even without the direct investment of a factory, it can cost these companies about $1 billion to create a smartphone chip from scratch.

Recently, these types of chips have made their way from smartphones like the iPhone to other types of devices because of their low power consumption and cost.

For example, Apple’s coming iPad tablet computer will run on an ARM chip. So, too, will new tiny laptops from Hewlett-Packard and Lenovo. A couple of start-ups have even started to explore the idea of using ARM chips in computer servers.

“Apple was the first company to make a really aspirational device that wasn’t based on Intel chips and Microsoft’s Windows,” said Fred Weber, a chip industry veteran. “The iPhone broke some psychological barriers people had about trying new products and helped drive this consumer electronics push.”

Companies like Nvidia and Qualcomm want to get their chips into as many types of consumer electronics as possible, including entertainment systems in cars, and home phones with screens and Web access.

At the Mobile World Congress in Barcelona, Spain, last week, manufacturers displayed a wide range of slick devices based on ARM chips, including a host of tablets and laptops. In addition, HTC released its Desire smartphone, built on a Qualcomm ARM chip called Snapdragon, which impressed show-goers with its big touch-screen display.

Meanwhile, Intel is about to enter the phone fray, both to expand its market and defend itself against the ARM chip makers. Its Atom line of chips, used in most netbooks and now coming to smartphones, can cost two to three times as much as the ARM chips, according to analysts. In addition, the Atom chips consume too much power for many smaller gadgets.

Intel executives argue that consumers will demand more robust mobile computing experiences, requiring chips with more oomph and PC-friendly software, both traditional Intel strengths.

“As these things look more like computers, they will value some of the capabilities we have and want increasing levels of performance,” said Robert B. Crooke, the Intel vice president in charge of the Atom chip. “We’re seeing that from our customers in a number of spaces, including digital TVs and hand-held devices.”

Intel also has deep pockets. As of December, the company had more than $9 billion in cash and short-term investments.

Mr. Crooke said that Intel’s manufacturing expertise would allow it to produce a new crop of chips every 18 months or so that would be cheaper and use less power. As rivals shift to more cutting-edge chip-making techniques, he said, they are likely to run into problems that Intel solved years ago.

At the same time, competition from other chip makers will pressure them to lower their prices.

“I don’t know whether it will make it harder for these guys to invest in the future, but you certainly would think so,” Mr. Crooke said.

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