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 designs and sells the hardware and semiconductor chips but does not manufacture the silicon wafers, or chips, used in its products; instead, it outsources the fabrication 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.

Key Takeaways

  • Semiconductors, or chips, are used in a variety of electronics, including digital cameras and smartphones.
  • Fabless chipmakers don't make the chips themselves, but instead, outsource the work to foundries or other outside manufacturers.
  • The fabless chip model developed in the 1980s when smaller chip makers were left with a surplus of product in a tough-to-crack market.
  • Fabless companies are often headquartered in costly, industrialized countries, while semiconductor foundries tend to be headquartered in countries where labor costs are cheaper.

Evolution of the Semiconductor Industry

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 the 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 2019, it remains the largest independent manufacturer of silicon components in the world.

The business model works by making use of the design, research, and development skills (and distribution networks) of the fabless company—and the specialized manufacturing skill of the chip foundries.

The Fabless Business Model

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.

Global chip sales rose to a record $468.8 billion in 2018, up 13.7% from the previous year, even as sales growth cooled in the second half of the year, according to the most recent statistics from the Semiconductor Industry Association.

One trillion

The number of semiconductors sold worldwide in 2018, an all-time record, according to industry data.

Biggest Fabless Chip Makers

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.

Global demand for semiconductors continues to rise, with sales hitting a record high of nearly $470 billion in 2018, despite slower growth during the second half of the year, according to the latest estimates from the Semiconductor Industry Association. The long-term growth prospects are strong.