Intel left behind as industrial manufacturers switch to custom chips

One of the biggest trends that no one talks about is the race for big companies to build custom microprocessors. This is how investors should play the idea.

Cruise Automation, the automated vehicle division of General Motors (GM) last week made a surprise announcement. The San Francisco, California-based company will develop custom chips.

This is really bad news for Intel (INTC). Let me explain.

Semiconductors are a modern marvel. The idea that something so small can also be so powerful is mind-blowing. Until recently, processors were getting much smaller with each new generation, and even more powerful. This dynamic is changing.

Bullets are always getting more powerful, but they don’t get much smaller. It’s a matter of size. Processors can’t get that small. To get more computing power from silicon, chip designers resort to task-specific silicon. And they change architecture.

This is the angle that Cruise takes. The GM unit plans to have custom chips in 2025 for its automated vehicles. It may not seem cost effective to start building chips from scratch. There are off-the-shelf GPUs available from companies such as Nvidia (NVDA). Most would analogize it to a car manufacturer making its own tires, except it’s not quite like that.

Cruise does not manufacture its chips per se.

The company designs and then outsources production to a manufacturer. A foundry, like Taiwan Semiconductor (TSM) is equipped with all the specialized machinery needed to manufacture state-of-the-art smart silicon. In theory, this cost could be recouped by increasing production.

Kyle Vogt, CEO, said Cruise will hit the custom chip sweet spot in 2025, when production of its Origin self-driving vehicle is expected to go into production. The origin is not really a spectator, but it is a complete and personal AV, without steering wheel or pedals. GM executives believe the transition deserves further consideration.

Automakers are trying to move away from reliance on traditional chip vendors. The entire industry has been held back since 2021 by the continued shortage of chips. Ironically, these shortcomings were caused by poor planning by automakers.

As the pandemic reached North America Ford (F), General Motors (GM), Toyota (TM) and other companies immediately began cutting chip orders in anticipation of slowing demand. Foundries replaced the production of older chips designed for the automotive sector with next-generation processors required by the consumer electronics sector. Automakers have moved to the back of the line.

The news that Cruise is designing chips is worrying for large-scale general-purpose chipmakers like Nvidia. However, the trend is deadly for Intel.

The San Jose, Calif.-based company is not only the largest producer of general-purpose chips, its entire business model depends on the mass adoption of its x86 chip architecture. These processors are based on the calculation of complex instruction sets. As end users turn to task-specific chips, the overall trend is clearly moving away from CISC.

Apple (AAPL) moved away from CISC last year with the introduction of its custom M1 chips for laptops and iPads. MI licenses intellectual property to ARM Holdings, a UK-based mobile IP technology company. ARM chip designs use reduced instruction set computing (RISC) architecture.

Reuters reported in early September, Cruise was only considering open source RISC and ARM-based architectures for his custom chips.

The trend is obvious and worrisome for Intel.

Intel shares have been under pressure since early 2021 when these trends became apparent. The company is trying to make the transition to other markets, including national defense.

To its Innovate presentation in San Jose yesterday, the company showcased Ponte Vecchio, a GPU that will be used in a new government supercomputer. Intel executives hope this processor will also help the company win market share from Nvidia in hyperscale data centers.

There is no reason to believe that hope will find an answer. Investors should avoid Intel stocks. Its biggest customers are turning away from Intel architecture. This trend is accelerating.

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