What Is a Fabless Company?

The term “fabless company” refers to a company that designs and markets hardware while outsourcing the manufacturing of that hardware to a third-party partner. 

The term is commonly used in relation to advanced chip designers, who hold the intellectual property (IP) for the chips they sell. Famous examples include Apple (AAPL), NVIDIA (NVDA), and Qualcomm (QCOM).

Key Takeaways

  • A fabless company is one that develops and holds IP while outsourcing the fabrication of its hardware.
  • The term is commonly used in the computer hardware market to refer to advanced semiconductor manufacturing.
  • This business model allows fabless companies to benefit from reduced labor costs and economies of scale, while focusing on the ongoing development and monetization of their IP portfolios.

How Fabless Companies Work

Fabless companies emerged due to the fact that the companies that develop the IP for new chip designs and other forms of advanced hardware are typically headquartered in developed countries in which the cost of labor is relatively high. As a result, fabricating the hardware in-house through a vertically integrated supply chain could prove uneconomical, leading to depressed margins and less capital available to fund further research and development (R&D).

For this reason, many successful companies have chosen to outsource the fabrication of their hardware to dedicated manufacturing firms. These companies are often located in countries with lower labor costs, in which local fabricators have built up considerable experience and expertise in this form of specialized manufacturing.

In the context of chip manufacturing, the companies that specialize only in fabricating the chips—without developing their own IP or marketing the end product—are commonly referred to as “chip foundries.” The largest such company is the Taiwan Semiconductor Manufacturing Company (TSM), which controls roughly 52% of the global market and generated nearly $35 billion in revenues in 2019.

Today, the cost of developing a new factory that could hope to compete with an established player such as TSM could cost upwards of $10 billion. When combined with the relatively low operational costs of the established foundries, this barrier to entry creates a significant incentive for fabless companies to continue outsourcing their manufacturing process.

Real-World Example of a Fabless Company

The United States is home to some of the most successful fabless companies in the world, many of which are internationally dominant in their respective markets. For example, Qualcomm is a $100 billion fabless company that holds a vast portfolio of IP relating to semiconductors, particularly those geared toward mobile phones. Its revenues, which reached nearly $24 billion as of September 2020, are substantially derived from the royalty streams earned on its IP licensing agreements.

NVIDIA Corporation is another prominent example of a successful American firm employing the fabless business model. A specialist in graphics processing unit (GPU) technology, the company now holds IP in areas such as mobile phone central processing units (CPUs), chipsets for motherboards, hardware and software for professional graphics visualization applications, and a variety of software products for both commercial and consumer-facing applications. As with all fabless companies, NVIDIA’s business model relies in large part on revenues from its IP portfolio and alliances with highly sophisticated manufacturing partners.