Why would one firm try to completely copy another firm’s production processes and why would the firm being copied let it happen? If two firms have identical processes, then it is essentially impossible for them to be differentiated. If they are competing for the same customers, they are basically setting themselves up for brutal price competition. But the Wall Street Journal reports that two big players in the semiconductor industry are doing just this (Samsung, Globalfoundries Agree to Adopt Same Production Process, Apr 17).
Samsung Electronics Co. and Globalfoundries Inc. said Thursday they have agreed to adopt the same production process as they upgrade their chip-manufacturing services, an unusual alliance with implications for many designers of computer chips and other devices, notably Apple Inc.
With the agreement, chips produced by Samsung and Globalfoundries will be essentially identical; companies that design chips could have their products produced in factories operated by either company with no extra effort.
Companies generally prefer to reduce their reliance on a single supplier for components. In this case, the pact between Globalfoundries and Samsung provides a new selling point as the two companies try to woo customers away from Taiwan Semiconductor Manufacturing Co., the biggest of the chip-making services known as foundries.
As the quote suggests, this is really focused on wafer fabs for outsourcing — clients hiring Samsung or Globalfoundaries to produce custom-designed chips. In some ways, this allows their clients to mimic Intel’s Copy Exactly strategy of duplicating fab set ups around the world so production yields and product characteristics are the same across a network of facilities. Intel credits this strategy with speeding product ramp up and increasing product availability.
The implicit assumption here is that the value created for clients by offering the flexibility to source from multiple fabs will trump being pushed into price competition with a competitor with exactly the same capabilities. There are some reasons think that it might be the case. First, wafer fabs are in some sense special. Technology is inherently fussy so clients in need of chips have a lots less flexibility than, say, someone looking to get T-shirts sewn. Being able to provide two equally capable plants then is a unique offering in the industry.
Second, while the production processes are identical, the fabs are unlikely to be in the same state when a customer needs to place an order. Wafers don’t move through a fab as predictably as cars going down an auto assembly line. Fabs are much more prone to congestion and just how soon a given fab is able to process an incoming order will vary. Thus when a client wants to place an order, there is a good chance that Samsung and Globalfoundries could be quoting very different lead times. Said another way, if clients care about lead times, one or the other of the foundries may effectively be a monopoly when a customer needs to buy.