Fabless manufacturing

Fabless manufacturing is the design and sale of hardware devices and semiconductor chips while outsourcing the fabrication or "fab" of the devices to a specialized manufacturer called a semiconductor foundry. Foundries are typically, but not exclusively, located in China and Taiwan because of the generally low cost of labor. Thus, fabless companies can benefit from lower capital costs while concentrating their research and development resources on the end market.

The credit for pioneering the fabless concept is given to Bernie Vonderschmitt of Xilinx and Gordon A. Campbell of Chips and Technologies. The first fabless semiconductor company, the Western Design Center, was founded in 1978. Xilinx, founded in 1984, was the first to "truly" separate the design of chips from their manufacture.

Prior to the 1980s, the semiconductor industry was vertically integrated. Semiconductor companies owned and operated their own silicon-wafer fabrication facilities and developed their own process technology for manufacturing their chips. These companies also carried out the assembly and testing of their chips, the fabrication.

Meanwhile, with the help of private-equity funding, smaller companies began to form, with experienced engineers exercising their entrepreneurial prowess by establishing their own IC design companies focused on innovative chip solutions.

As with most technology-intensive industries, the silicon manufacturing process presents high barriers to entry into the market, especially for small start-up companies. At the same time, Integrated Device Manufacturers (IDMs) had excess production capacity. The smaller companies began relying on IDMs to manufacture the chips they were designing.

These conditions underlay the birth of the fabless business model. Companies were manufacturing integrated circuits (ICs) without owning a fabrication plant. Simultaneously, the foundry industry was established by Dr. Morris Chang with the founding of Taiwan Semiconductor Manufacturing Corporation (TSMC). Foundries became the cornerstone of the fabless model, providing a non-competitive manufacturing partner for fabless companies.

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