IBM Systems Get Breathing Room With Globalfoundries Chip Deal
The much-rumored sale of IBM's chip manufacturing business has come to pass with Big Blue forging an agreement with Globalfoundries, the former fab business of AMD and a long-time co-development partner for basic chip manufacturing research. The move gives IBM a ten-year roadmap for its Power and System z processors, the former being used in high-end systems and storage, and the latter being a big source of hardware and software profits for the company.
That IBM Microelectronics ended up being acquired by Globalfoundries is not much of a surprise. IBM and Intel are essentially the last of the server processor makers that fab their own chips with AMD, Fujitsu, Oracle, Unisys, and others all having long since switched to fabless manufacturing with partners, more often than not with Taiwan Semiconductor Manufacturing Corp., Globalfoundries' main rival in the chip business. Each successive node shrinking the chip manufacturing process costs more and the industry is also moving from 300 millimeter wafers to 450 millimeter wafers over the next several years, which is an enormous capital outlay for any chip maker. The many, many billions of dollars of capital investment could not be justified based on the low volumes that IBM Microelectronics has after having lost the game console businesses of Sony, Microsoft, and Nintendo to AMD. Intel had a high volume PC chip business and a ramping smartphone and tablet chip business that makes it possible for the company to fab its own server chips, and if you want to know why Intel is focused on smartphones and tablets, this is why. In the chip manufacturing business, volume is everything because it takes lots of chips to earn all of those billions of dollars invested back.
To give you a sense of scale of investment, Sanjay Jha, CEO at Globalfoundries, said that the company would be investing $10 billion in 2014 and 2015 across its many facilities and will have invested a total of $12 billion in the state-of-the-art Fab 8 plant in Malta, New York, a little bit north of IBM country and not too far away from the joint research center that IBM, AMD, and Globalfoundries operate at the State University of New York in Albany.
Under the deal announced today between IBM and Globalfoundries, IBM booked the sale of the chip business effective September 30, so all of its costs and charges could be allocated to its third quarter financial results, which we report on elsewhere. IBM has agreed to pay Globalfoundries $1.5 billion in cash over the next three years, and working capital adjustments are expected to cushion that down to around $1.3 billion out of IBM's wallet. IBM is booking another $2.4 billion in asset impairment charges, and will book another $800 million in other costs that were not further specified in a deal summary posted on IBM's investor relations site. Last year, IBM Microelectronics had sales of $1.4 billion and booked a pre-tax loss of $700 million; for the first six months of 2014, it had $600 million in sales and had pre-tax losses of $400 million. You can see now why IBM wants to get out of this business. The company simply does not have the scale to operate profitably.
And yet, it still needs to find a source for its Power and mainframe processors and find someone who will pick up the merchant silicon business that IBM Microelectronics does. As far as EnterpriseTech is concerned, it is the 22 nanometer chip fab in East Fishkill, New York, that matters most, since this is where IBM manufactures its Power and System z processors and various glue chips for its high-end systems. But IBM has a tidy business in its Essex Junction, Vermont, fab that sells radio frequency devices and does other custom ASIC design.
The deal struck between the two companies calls for IBM to transfer thousands of patents and around 5,000 employees to Globalfoundries, Jha explained on a conference call with reporters. This pool of employees includes around 800 chip technologists, and John Kelly, senior vice president and director of research at IBM called them "some of the best manufacturing and research people in the world." (A small team of Microelectronics employees who focus on servers will remain with Big Blue; the size of that team was not divulged.) Globalfoundries has 3,000 employees of its own in New York, so this represents a sizable increase in its workforce in the region.
No one disputes IBM's ability to develop chip manufacturing technologies or chip designs – it has managed to stay in the game despite the overwhelming pressure in the IT industry to standardize on X86 processors, and increasingly X86 processors from Intel. But as both IBM and Globalfoundries have pointed out – and as AMD came to the conclusion of six years ago – you have to have scale to not lose a lot of money in chip manufacturing.
Nothing will change overnight in terms of IBM's systems because of this deal. A chip design – including the tools to create it as well as the photomasks that are used to etch the chips in the plant – are intimately tied together with the manufacturing equipment, and therefore, chip designs are not portable across different manufacturers. If there were, then there would only be one fab in the world and it might very well be run by Intel. IBM's copper and silicon-on insulator (SOI) chip technologies have given it some advantages in terms of performance and energy efficiency for server and storage processors, but that has come at a cost as Power chip volumes are fairly low by industry standards.
The good news is that the chip technologies that are being used for server processors are converging with the same processes that are being developed for low-power consumer devices such as tablets and smartphones, that means that over time IBM can get off of its essentially proprietary and expensive copper/SOI processes and onto bulk silicon processes that Globalfoundries is creating. That is, indeed, the plan. Kelly told EnterpriseTech that the current 22 nanometer process used to make the Power8 processors would soon be used to create the next generation of System z chips, known as the z13 if the naming is consistent with the past. The next node that Globalfoundries and IBM will work together on is at 14 nanometers, which presumably IBM was working on already for its Power8+ chips. Kelly said that during the 14 nanometer node the processes will "move towards" Globalfoundries, but would "still have some IBM content." The plan is to be on a common platform by the 10 nanometer node, meaning that IBM will be using the same processes that other server chip customers that rely on Globalfoundries are using.
It is hard to imagine how IBM could have affording to have its own manufacturing plants for 14 nanometer and 10 nanometer equipment, particularly if there is a shift to 450 millimeter wafers in there at the same time. As it is, IBM has committed $3 billion to do fundamental semiconductor and systems design research over the next five years, a commitment that does not change one bit because of this deal with Globalfoundries. It is reasonable to conjecture that this research commitment was made public back in July precisely because rumors were going around that IBM was looking to sell off the chip manufacturing business. IBM wanted to mollify the fears of Power Systems customers, who are at the ramp of a new generation of Power8 machines, and System z customers, who are anticipating a new generation in 2015.
With this deal, Globalfoundries becomes the exclusive provider of server processors for IBM for the next decade, which runs through the 10 nanometer node. Globalfoundries also gets access to the results of the $3 billion in R&D that IBM committed, presumably only the portions that relate to semiconductor design, manufacturing, and packaging, not to system design. (Although, honestly, with the integration of components, it is hard to say where the chip ends and the system begins these days.) Globalfoundries has committed to providing IBM will "supply at market based pricing," and this is clearly important to Big Blue. The chip plants in Vermont and New York are costing it $4.7 billion to get off its books, and the last thing it wants is for the future Power and System z processors to be more expensive than competitive products. IBM was probably not thrilled to add in people and patents to sweeten the deal with Globalfoundries, much as it probably was not thrilled to add in so much of its software and storage stack to close the System x division sale to Lenovo Group. But when you are selling businesses that are either at breakeven or losing money, it is hard to exact terms from the buyer. You do the deal you can get done and you move on.