The late winter storm now pounding the northeast US isn't the only freak weather event currently in progress. Hell itself has frozen over, and the proof is that, for the first time in history, Intel is partially outsourcing the fabrication of one of its CPUs to a foundry.

Intel and TSMC have jointly announced the start of a long-term, "strategic" collaboration in which Atom IP will be ported to TSMC's manufacturing process, with the Taiwanese foundry fabricating Atoms for some customers.

"It is a long-term collaboration. It is not about capacity. It's a strategic relationship that allows us to expand the growth opportunities for both companies," said an Intel spokesperson on a call announcing the venture. "This relationship between us and TSMC is strategic in nature; it's the first time we've ported a processor externally outside of an Intel process."

Both parties are being deliberately vague on the timing and the process node at which this will start, stressing that the current announcement is just about the "memorandum of understanding" (MOU) that they've signed. (The press release is similarly vague.) News of specific plans and products will follow much later, once the details have been worked out.

Intel's Sean Maloney set out to give the company's official explanation for the move by touting Intel's recent announcements of investments in 32nm and stressing that Intel still sees itself as a manufacturing company. He then jumped to the non-sequitur that the TSMC agreement will allow Intel to "attack new markets" and offer "post-recession products."

In response to questions, Maloney stressed that the existing Atom roadmap is unchanged, and that the TSMC relationship was not about replacing Intel's existing fab capacity, but about new markets. "We're doing it because it enables us to get access to a market that we can't do alone," Maloney said. "This doesn't replace what we're doing already, or what they're doing already. It's additive to what we're currently doing."

Intel totally failed to explain why its massive new investments in 32nm, not to mention its current 45nm plants and substantial legacy fab capacity, aren't just as amenable to "attacking new markets" as outsourced fab capacity. But while Intel can't possibly admit this, the reason is as clear as day: Atom is just too cheap to support Intel's legacy business model, which is about funding expensive new fabs on the backs of high-margin sales of existing, high-performance processors.

Betting the farm

Intel's margins on Atom are much thinner than those on regular desktop and server CPUs, and with each process shrink, Atom's cost (and price) will go down. But fabs get more expensive with each shrink, so the result is that Intel has to sell many more Atoms at 32nm than it does at 45nm to make money. The demand for all of those Atoms may or may not materialize, which is why Intel will pay TSMC to fab them and share the risk that the demand may not be there. Meanwhile, Intel wants to save its (very costly) in-house fab capacity for high-margin products, like its CPUs.

There's one big question about the new arrangement: could Intel actually stay in business by producing mainly Atom-class products on its 32nm and smaller lines, if the demand for performance increases fails to recover?

The main problem facing Intel is that, right now, nobody wants high-margin, high-performance CPUs. The demand is there for the cheap stuff, but Intel would rather not take the risk that this appetite for cheap will continue to balloon by turning even more of its premium in-house fab capacity to the task of cranking out Atoms. Better to dedicate the costly new 32nm fabs to producing high-margin CPUs on the hopes that demand for performance will eventually recover, while letting TSMC's fabs support any further growth in the Atom market.

There's one big question about the new arrangement: could Intel actually stay in business by producing mainly Atom-class products on its 32nm and smaller lines, if the demand for performance increases fails to recover? In other words, it could be that Intel has no choice but to bet everything on the possibility that a global appetite for 32nm, high-performance, high-margin CPUs will actually rematerialize, because the company couldn't keep going if it had to use its new fabs to support a rising demand for Atoms in-house.

I think the answer to the above question is "no, Intel couldn't survive in a world where the vast majority of customers just want ever cheaper Atoms, and relatively few are willing to pay premiums for continued performance scaling." I don't have the numbers to back this up, though.

On a final note, props to Dave Manners, who saw this coming when Craig Barrett simply resigned as Intel's Chairman without triggering the normal chain of succession at the company:

It looks as if, instead of waiting for the normal orderly succession, Barrett has decided that it's time to go. Now why should he want to go? Having survived 35 years in the fearsomely confrontational Intel culture, he would not leave over a small thing. But there's one issue he might leave over: Intel's strategy as a manufacturer. Intel has always been a leader in process engineering. Barrett came from the manufacturing side of Intel, and re-vitalised the companies' fabs during his time as CEO with his 'copy exactly' strategy. If there was to be any change proposed in Intel's manufacturing strategy, Barrett might decide he doesn't want to stay around to preside over it.

Today's announcement of a major shift in Intel's manufacturing strategy suggests that this is exactly what happened. Barrett apparently didn't want to stick around at an Intel that outsources parts of its core CPU business.

Listing image by Intel