Industry Structure
IDMs, fabless companies, and foundries — the three business models
Three Business Models
Three Business Models
The semiconductor industry has evolved from vertically integrated companies to a specialized ecosystem with three main business models:
- IDM (Integrated Device Manufacturer): Companies that design AND manufacture their own chips. Examples: Intel, Samsung, Texas Instruments. They own their own fabs.
- Fabless: Companies that design chips but outsource manufacturing to foundries. Examples: Apple, Nvidia, AMD, Qualcomm, Broadcom. They focus purely on design innovation.
- Foundry: Companies that manufacture chips designed by others. Examples: TSMC, GlobalFoundries, UMC. They invest billions in cutting-edge fabs and process technology.
Key Concept: The Fabless Revolution
The fabless model was pioneered in the 1990s when building a fab became prohibitively expensive ($1B+). Today a leading-edge fab costs $20–30 billion. The fabless model lets companies like Nvidia innovate in design without the enormous capital expense of fab ownership.
There are also OSAT companies (Outsourced Semiconductor Assembly & Test) like ASE and Amkor that specialize in packaging and testing — another specialized segment of the ecosystem.
The Foundry Model
The Foundry Model
TSMC (Taiwan Semiconductor Manufacturing Company), founded in 1987 by Morris Chang, pioneered the pure-play foundry model — manufacturing chips for other companies without competing against them with its own products.
The foundry model creates a virtuous cycle:
- More customers → more revenue → more R&D investment → better process technology → more customers
TSMC's dominance is extraordinary: it holds ~60% global foundry market share and manufactures chips for Apple, Nvidia, AMD, Qualcomm, and hundreds of other companies.
Analogy: The Restaurant Kitchen
Think of foundries as professional shared kitchens (commissary kitchens). Multiple restaurant brands (fabless companies) use the same kitchen facilities. Each brand provides their own recipes (chip designs), and the kitchen handles all the cooking (fabrication). This is more efficient than every restaurant building its own kitchen.
Knowledge Check
Knowledge Check
1 / 2What is a 'fabless' semiconductor company?