Key Takeaways for Intel from AMD’s Strategic GlobalFoundries Spin-Off: Can a Fabless Model Address Intel’s Challenges?

Intel is wrestling with the prospect of spinning off its foundry division into an independent entity. This hesitation draws attention to a significant historical lesson from its chief competitor, AMD, which faced a similar crossroads in the past.

Recent developments indicate that Intel’s foundry operations are heavily affected by prevailing economic and political conditions. While some board members and shareholders express support for a possible spin-off, CEO Lip-Bu Tan is reportedly opposed. This internal discord has injected uncertainty into the company’s future direction. To shed light on this dilemma, the experience of AMD, which transitioned to a fabless business model, serves as a compelling case study.

Background: AMD’s Transition to a Fabless Model

Divisional spin-offs are often driven by economic circumstances, a fact illustrated by AMD’s struggles in 2008. At that time, the company faced significant delays in product launches, particularly in its server CPU lineup. The holdup of its quad-core Opteron server led to steep declines in shareholder value, compounded by similar issues plaguing the consumer-focused Phenom line.

These setbacks severely tarnished AMD’s financial outlook. In contrast, Intel’s performance was robust, placing AMD in a precarious position. The company recorded substantial operating losses over several years, primarily due to the high costs associated with semiconductor manufacturing—an area that was crucial to its business. By 2008, AMD’s foundry division struggled with advanced manufacturing processes, with little indication of improvement in sight.

Faced with declining market share and continuous losses, AMD made the pivotal decision to adopt a fabless model. This resulted in the formation of “The Foundry Co., ”later renamed GlobalFoundries, a move that involved a partnership with Abu Dhabi’s Mubadala Investment Company. The deal not only provided AMD with $700 million in cash but also relieved $1.1 billion in debt, alongside securing a 34% stake in the new firm.

The transition to a fabless structure enabled AMD to mitigate manufacturing costs and enhance its competitive positioning by sourcing advanced chips from Taiwan’s TSMC, which was achieving significant breakthroughs at the time.

Evaluating AMD’s Decision: Are the Lessons Applicable to Intel?

While there are certainly downsides to AMD’s spin-off of GlobalFoundries, such as the significant increase in the latter’s current valuation to around $16 billion, it is clear that the shift allowed AMD to establish a critical partnership with TSMC. Although some commentators highlight AMD’s dependence on TSMC, the results speak for themselves—AMD has produced some of the industry’s leading processors since the pivot.

Currently, Intel can glean significant insights from AMD’s experience. The unsustainable nature of operating a foundry burdened with steep losses can adversely affect product quality and overall market competitiveness. By considering a spin-off, Intel could potentially improve its cash flow and focus on enhancing its product lineup, leveraging external manufacturing capabilities to develop more advanced CPUs and GPUs.

Reports indicate that Intel’s foundry division could incur losses of approximately $13 billion in 2024, accounting for nearly 10% of the company’s market capitalization. These financial struggles raise pressing questions about the viability of continuing with the foundry as a major segment of Intel’s business, particularly in light of leadership dissent regarding a potential spin-off.

Intel’s Foundry Spin-Off: Conflicting Perspectives

The question of whether to spin off Intel Foundry is clouded by various factors, including political influences and differing opinions among board members. Many advocates see the potential for a spin-off to fortify a U. S.-based semiconductor consortium, enhancing domestic manufacturing capabilities.

Conversely, CEO Lip-Bu Tan appears to prioritize the foundry’s ongoing technological advancements, particularly in developing the crucial 18A process. Given the substantial investments in R&D under the leadership of former CEO Pat Gelsinger, a spin-off at this juncture could undermine progress and erode Intel’s competitive edge.

In efforts to recover from financial adversity, Intel is making operational adjustments, including significant layoffs and abandoning less promising projects. Despite the internal push for a spin-off driven by shareholder interests, the board faces a complex decision that could fundamentally shape the company’s business model.

Entrance of a modern GlobalFoundries building under a blue sky.

In my view, Intel should allow the 18A process to fully mature and be integrated into its products. If upcoming offerings like Panther Lake and Clearwater Forest deliver expected results, the foundry division’s status could improve. Reports suggest that CEO Tan is targeting around 70% yield rates for the 18A process to ensure profitable high-volume manufacturing. Success in this venture is crucial for Intel, further solidifying its position as a key player in the semiconductor landscape.

Given recent strategic shifts, Intel has opted to scale back its race for advanced nodes due to insufficient external demand, which could help mitigate future losses. Consequently, refining the 18A process to rival TSMC’s N2 becomes a priority, particularly since this represents a domestically-developed solution enhanced by political and economic support.

While earlier discussions suggested a collaborative deal between Intel and TSMC, such partnerships may lack sustainability in the long term. Instead, Intel must focus on advancing its own chip technologies, especially under CEO Tan’s guidance, which may herald a more promising future bolstered by the Intel Foundry Services (IFS).

Factor	If Spin-Off Happens	If Spin-Off Doesn’t Happen
R&D Continuity	Possible disruption to 18A process advancements; potential loss of momentum after significant investments under Gelsinger.	Ensures development of 18A and 14A remains within Intel, facilitating synergies with upcoming projects.
Political Risk	Aligns with shareholder goals for a U. S.-led consortium; reinforces domestic manufacturing initiatives.	Retains Intel’s strategic manufacturing role but faces significant pressure from stakeholders if foundry performance wanes.
Cash Flow	Could produce immediate funding similar to AMD’s spin-off benefits.	Absence of immediate cash resources; relies on cost-cutting measures to improve liquidity.
Competitive Position	May allow focus on product design similar to AMD’s strategy but at the cost of in-house manufacturing oversight.	Preserves a vertically integrated structure, enhancing competitive potential if 18A achieves expected yield rates.