Intel and Qualcomm would make unusual bedfellows. The former dominates the markets for PC and data center chips with its x86 architecture. The latter is known mainly for its smartphone technologies, fusing its expertise with chip blueprints supplied by the UK's Arm. For years, x86 and Arm have scrapped on each other's turf. But Qualcomm now looks set to become an Intel customer.

It has been unveiled as the first client of Intel Foundry Services (IFS), a $20 billion attempt to establish Intel as a contract chipmaking alternative to Asian giants Samsung and TSMC. If the government-backed initiative works out, it will give the US its own manufacturing champion and weaken Asia's position. It could also be a lucrative source of revenues for Intel.

While the US is home to many of the world's most advanced chip designers, it has lost ground in manufacturing. Taiwan's TSMC has emerged as the world's dominant foundry for cutting-edge chips and is reckoned to be a couple of generations ahead of Intel. Its state-of-the-art technology uses transistors measuring just five nanometers, allowing more to be crammed into a single chip. The best Intel can manage is ten.

The US firm is now desperate to catch up. With the support of the Biden administration, it has promised to invest $20 billion in new chipmaking facilities in Arizona. The key difference between this and previous investments is that new facilities will crunch out chips for other designers, not just Intel. "There's a lot of excitement in the marketplace, one hundred plus customers in the pipeline already, and you can expect to see great things in this area of a new and exciting business," said Pat Gelsinger, Intel's CEO, on a call with analysts last week.

Meet the new president, same as the old president

The investment is partly being made at the US government's behest in the interests of technology security. Relations between China and the US are at an all-time low, and Joe Biden, America's latest president, has continued the campaign against Chinese companies that started under Donald Trump, his predecessor. US authorities are understandably nervous that most of today's advanced foundries are in China's backyard. A Chinese invasion of Taiwan, expected at some point in the next decade, could put the most advanced chips out of US reach. That would be devastating to the US economy.

Companies are already reeling as demand for semiconductors massively outstrips supply. Amid lockdowns triggered by the pandemic, businesses and consumers have grown more reliant on technology. Stockpiling of semiconductors by some organizations has made the current shortage even worse. Huawei, a Chinese maker of network equipment, appears to have bought heavily from TSMC before US sanctions came into effect last year, cutting it off from the Taiwanese firm.

TSMC's recent performance will have caught Gelsinger's attention as he prepares to launch a competitor. In its recent second quarter, it reported record revenues of $13.3 billion, a 28% year-on-year increase, and it is predicting sales growth of 23% for the current third quarter. Its share price has more than doubled since March last year, rising from 274 Taiwanese dollars to TWD580 in Taipei.

There is even speculation that Intel has made a $30 billion offer to acquire GlobalFoundries, a foundry spun out of AMD in 2008 and today owned by Abu Dhabi's Mubadala Investment Company. Asked about reports on last week's call, Gelsinger replied: "At this point, we would not say that M&A is critical, but nor would we rule it out. Our view is that industry consolidation is very likely."

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GlobalFoundries would not help Intel to catch up with TSMC, though. It gave up trying to compete on transistor size several years ago and is today focused on the 22-nanometer to 90-nanometer range. Nor does Intel expect to start shipping seven-nanometer chips until early 2023.

Closing the gap on TSMC will be tough. The Taiwanese firm has announced plans to invest as much as $100 billion in new facilities and technologies over the next three years, a figure that would dwarf spending by Intel. Taiwan's government is sure to be supportive given TSMC's importance to the country's economy and the challenge coming from its US rival. Unlike Intel, moreover, TSMC is focused solely on being a foundry.

The risk that its foundry scheme becomes a costly distraction from Intel's other activities is perhaps one of the main concerns for investors. The other is the obvious conflict of interest. Intel's activities in mobile networks and other sectors mean it increasingly competes against companies like Qualcomm that use Arm blueprints. How many will trust Intel with the manufacture of their products?

If Qualcomm represents at least one of them, it may have years to wait before anything is ready. According to Intel's statement, Qualcomm will take advantage of a new process technology called 20A, featuring a new transistor architecture (RibbonFET, an update to FinFET) and an implementation of backside power delivery (PowerVia), designed to improve signal transmission. Intel does not expect 20A to "ramp" until 2024, and Qualcomm is the only chip customer named so far. While AWS was also referenced in this week's news, that was only as a customer of new packaging solutions.

Gelsinger insists dozens of IFS customers are lining up, but he has zero experience as the boss of a foundry, while Intel has thrived as something quite different. Projects influenced by protectionism and nurtured by governments do not always have a happy story to recount. This is one that shareholders should view with considerable skepticism.

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— Iain Morris, International Editor, Light Reading