A:

Fabless chip makers are companies that produce semiconductors for use in various types of electronics, such as digital cameras, smartphones and the new technologically sophisticated “smart” cars. The term "fabless" means that the company does not manufacture the silicon wafers, or chips, used in its products; instead, it outsources the work to a manufacturing plant, or foundry. Many of these foundries are located in Taiwan and China, where skilled labor is plentiful and cheap, which keeps production costs low and return on investment high.

During the technology boom of the 1970s, all top manufacturers of semiconductors maintained a vertically integrated business model: designing, testing and building the products they sold. Then, in the early 1980s, smaller manufacturers began to enter to marketplace, but strong barriers to entry meant that many of these companies were producing more chips than they could use. This surplus, combined with the continued growth of the semiconductor industry, led to the creation of the fabless business model.The first foundry, Taiwan Semiconductor Manufacturing Company, was built in 1987; as of 2015 it remains the largest independent manufacturer of silicon components in the world.

The fabless business model is popular in the semiconductor industry because it allows manufacturers to invest profits in research and development of new technologies while maintaining the high production volumes needed to maintain sales, which continue to grow. In 2014, global chip sales rose 7.9% to $339.8 billion, up from $306 billion in 2013, which marked a 5% year-over-year increase from 2012. The list of top-20 fabless chip makers worldwide includes four U.S. companies: Qualcomm, Broadcomm, AMD and Nvidia. Intel, which entered the foundry business in 2010 when it began selling its integrated circuits to the startup Achronix Semiconductor, still tops the list in overall semiconductor sales.

RELATED FAQS
  1. What are foundry companies in the electronics sector?

    Explore the role of foundry companies within the electronics industry. Find out how foundries improve their products and ... Read Answer >>
  2. What are the most popular leveraged ETFs that track the electronics sector?

    Discover the most popular leveraged ETFs that track the electronics sector. Semiconductors are an integral member of the ... Read Answer >>
  3. What are the main types of chips produced by semiconductor companies?

    Learn about two ways in which chips in semiconductors industry are categorized: by functionality and by type of integrated ... Read Answer >>
  4. What consumer products drive most of the demand for chips produced by semiconductor ...

    Learn how the demand for consumer products, such as smartphones and cloud-based services, is increasing the market for semiconductor ... Read Answer >>
  5. What impact does Moore's Law have on the electronic sector?

    Understand the groundbreaking implications of Moore's Law on the economic health of several industries, including semiconductors ... Read Answer >>
Related Articles
  1. Investing

    Is Smaller Better? In the Chip Sector, Yes: TSM

    One of the world's biggest semiconductor manufacturers, one you might never have heard of, creates products you use every day.
  2. Investing

    The World's Top 10 Semiconductor Companies (TSM,INTC)

    Discover how some of the most successful companies in the semiconductor industry are well-known brands while others are thriving in relative obscurity.
  3. Investing

    Semiconductor Stocks Solid Amid Bull Market (SOXX)

    The PHLX Semiconductor Index has spiked more than 40% this year as bullish investors bank on heightened commodity demand to drive chip industry growth.
  4. Trading

    The Basics Of Trading Chip Stocks (INTC, TXN)

    Semiconductor companies offer an endless variety of trading and investment opportunities.
  5. Investing

    Samsung Is Creating a Separate Contract Chip Manufacturing Unit

    Samsung Electronics is creating a separate semiconductor contract manufacturing unit aimed at luring new customers.
  6. Insights

    Trading Semiconductor Chip Stocks

    Historically, mid- and small-cap semiconductor companies have generated momentum because they usually show the most growth potential. Companies within this range are often those that have yet ...
  7. Investing

    SMH: Market Vectors Semiconductor ETF

    Discover how the Market Vectors Semiconductor ETF chooses its securities, and learn the types of investors for whom this fund is most appropriate.
  8. Insights

    Who Are Advanced Micro Devices' Main Competitors? (AMD)

    Learn about the financial profiles of four of Advanced Micro Devices' competitors and each company's specific product niches.
  9. Investing

    USD vs. SOXL: Comparing Leveraged Semiconductor ETFs

    Discover and compare two semiconductor exchange-traded funds. Learn about their purpose, strategy, characteristics and investor suitability.
  10. Investing

    AMD Stock: Analyzing 5 Key Suppliers

    Learn about the business operations of five key companies serving as supply partners in support of AMD's global semiconductor business.
RELATED TERMS
  1. Fabless Company

    The Fabless Semiconductor Association (FSA) defines fabless as ...
  2. Semiconductor Industry ETF

    A sector-following fund that invests in developers, manufacturers ...
  3. Morris Chang

    The founder, chairman and CEO of Taiwan Semiconductor Manufacturing ...
  4. Philadelphia Semiconductor Index - SOX

    A price-weighted index composed of 18 U.S. semiconductor companies ...
  5. Semiconductor

    A materials product - usually comprised of silicon - which conducts ...
  6. Blue Chip Indicator

    A formal gauge or measure of the performance of a selected group ...
Hot Definitions
  1. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  2. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
  3. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  4. The Bernie Madoff Story

    Bernie Madoff ran a multibillion-dollar Ponzi scheme that is considered the largest financial fraud of all time.
  5. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, ...
  6. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
Trading Center