Intel’s manufacturing business suffers a setback as Broadcom tests disappoint, sources say

(Reuters) — Intel’s ( INTC ) contract manufacturing business has suffered a setback after tests with chipmaker Broadcom ( AVGO ) failed, three sources familiar with the matter told Reuters, dealing a blow to the company’s turnaround efforts.

Broadcom’s tests involved sending silicon wafers — the foot-wide discs on which chips are printed — through Intel’s most advanced manufacturing process, known as 18A, the sources said. Broadcom got the chips back from Intel last month.

After its engineers and executives studied the results, the company concluded that the manufacturing process was not yet viable to move to high-volume production.

Reuters could not determine the current relationship between Broadcom and Intel or whether Broadcom has decided to back out of a potential manufacturing deal.

“The Intel 18A is up, healthy and performing well, and we remain on track to begin high-volume production next year,” an Intel spokesperson said in a statement. “There is a lot of interest in Intel 18A across the industry, but as a matter of policy we do not comment on specific customer conversations.”

A Broadcom spokesman said the company is “evaluating Intel Foundry’s product and service offerings and has not completed that evaluation.”

Intel’s contract manufacturing business was launched in 2021 as a key part of Chief Executive Pat Gelsinger’s turnaround strategy.

Broadcom isn’t a household name, but it makes essential networking equipment and radio chips that helped generate $28 billion in total chip sales in its last fiscal year. It has benefited from increased spending on artificial intelligence hardware, with JP Morgan analyst Harlan Sur forecasting $11-12 billion in AI revenue this year, up from $4 billion last year.

Some of its chip sales come from agreements with companies such as Alphabet’s Google and Meta Platforms to help produce AI processors in-house, which may include arrangements with a manufacturer such as Intel or Taiwan Semiconductor Manufacturing Co.

Crucial recoil

As part of a disastrous second-quarter earnings report that slashed more than a quarter of the company’s market value, Intel announced a 15 percent job cut and a reduction in construction-related capital spending his factory. Gelsinger and other executives will present a plan to the board in mid-September on possible cuts to business units and teams to cut costs, Reuters reported on Sunday.

Intel has committed to about $100 billion in expansion and construction of new factories at several locations in the US. A crucial part of the company’s expansion includes attracting large customers such as Nvidia or Apple to fill capacity at all of its new locations.

The story continues

Intel reported an operating loss of $7 billion for its foundry business, higher than losses of $5.2 billion a year earlier. Executives expect the contract chip business to break even in 2027.

Typically, manufacturing an advanced chip requires more than 1,000 separate steps inside a chip factory or factory and takes about three months. Manufacturing success is determined by the number of working chips on each silicon wafer. Achieving substantial yield is critical to moving to producing the tens of thousands or hundreds of thousands of wafers required by major chip designers.

Broadcom engineers had concerns about the viability of the process, the sources said. This usually refers to the number of defects on each die or the quality of the chips being manufactured.

For an advanced manufacturing process used by TSMC ( TSM ), the Taiwanese giant charges about $23,000 per high-volume wafer, according to two sources familiar with wafer pricing. Reuters could not determine the price for Intel’s wafer.

TSMC declined to comment on wafer pricing.

Moving a chip design from a manufacturing process used by a company like TSMC to another vendor like Samsung or Intel can take months and require dozens of engineers, depending on the complexity of the chip and differences in manufacturing technology.

Betting on a new manufacturing process like Intel 18A is impossible for some smaller chip companies because it would require resources they don’t have.

Intel rolled out its manufacturing toolkit for its 18A process to other chipmakers over the summer, Gelsinger said on an earnings call last month.

The company plans to be “production ready” by the end of this year for its own chips and begin high-volume production for external customers in 2025, Gelsinger said. On a conference call with investors last week, he said there were a dozen customers “actively engaged” with the toolkit.

(By Max A. Cherney in San Francisco; Editing by Kenneth Li and Matthew Lewis)