5 ms·

It's so weird that an oligopolistic industry with the largest barriers to entry (your average CPU factory will cost $5/10+ billions, and that's just the factory

by axlee 3y ago

It's so weird that an oligopolistic industry with the largest barriers to entry (your average CPU factory will cost $5/10+ billions, and that's just the factory) have the lowest margin, by far. Why is that so?

bootloop 3y ago
I guess that is what competition brings to the table.
FredPret 3y ago
It might be that that's not as high of a barrier to entry as it seems. It would cost much more than that to replicate the engineering quality that goes into the Apple system of products for instance.
- lotsofpulp 3y ago
  Also, Apple has lots of products and services to lots of potential buyers it can sell to at lots of price points, whereas a fab owner only has a few buyers and therefore less negotiating power, plus all the buyers are sophisticated and well informed.
Guvante 3y ago
They made a ton of money not long ago. 30% in 2021 eye balling it. But all those factories have to be paid for no matter income. So if income goes down your profit margin goes to terrible.
- chorsestudios 3y ago
  This particular bump in sales might be attributable to the boom in computer sales resulting from COVID and the surge in WFH.
Scoundreller 3y ago
AMD is fabless since 2008/2009 (and sold its last stake in the subsidiary in 2012): https://en.m.wikipedia.org/wiki/GlobalFoundries https://en.m.wikipedia.org/wiki/GlobalFoundries
gary_0 3y ago
You're looking at the wrong company. TSMC has a margin of 40%.
- jandrese 3y ago
  And Intel has just been poorly managed for over a decade now.
asianometry 3y ago
I cannot speak to AMD, but for the case of Intel, it is hard to be a fast follower. The billion dollar factory translates to hundreds of millions of dollars of depreciation each year - a fixed cost that means declines in revenue hit the bottom line very hard.
dathinab 3y ago
While there are not many competitors, they still do (most times) properly compete due to various factors like pressure from their customer (some very very large with the capabilities to become a competition iff they stop innovating and/or become to expensive), but also factors like political pressure to stay ahead of mainland china. Through TSMC for example has margin >40%. Which isn't that surprising I mean there is not much competition. Intel doesn't (yet) provide their capabilities to anyone else, and the other competition is behind enough to not be an option for many things, especially high end and/or high efficiency. What is quite fascinating is that while TSMC is a close to monopoly(/duopoly if you count Intel) in many sectors and takes advantage of it they seem to have successfully resisted the common problem of such companies stopping/slowing innovation and similar problem. I'm not sure if it's related to the additional pressure of them being on of the main lifelines for Taiwan or if they have just pretty good management or if it's because they still competition oligopoly main customers do push them to do so.
- chii 3y ago
  i suspect that TSMC doesn't have as big a monopoly as you've made it out to be, not because intel is competing, but because the customers of TSMC are large enough that they "force" the innovation (aka, they "threaten" to not use them if they stop innovating). Also, TSMC hasn't been around long enough to become the slow behemoths that other big monopolies have become.
  - hughesjj 3y ago
    I think it's just a matter of 'if you stop innovating, others will catch up quicker than you expect'. It's a continual r&d March, and you don't want to end up like Intel and get stuck on 14nm forever And Intel was a company that was still shoving billions into r&d, yet still got stuck So much of the tech industry has Moore's law baked into the supply chain forecasts, so lots of incentive to deliver on it.
  - civilitty 3y ago
    TSMC doesn’t have a real monopoly, they’re just a few years ahead of everyone else in integrating ASML’s latest tech. Samsung and Intel aren’t very far behind. The more money TSMC charges the more incentive the others have to catch up but they can only move so fast. GlobalFoundries and STMicroelectronics seem stuck in the double digits. It makes a big difference to a few competitive customers so TSMC gets paid well for that first mover advantage, but yeah it’s not well secured monopoly.
ksec 3y ago
AMD they had amortisation assets with the Xilinx acquisition. Otherwise they are doing in the industry standard 20% margin if I remember correctly. Intel has been burning their cash to try and catch up in both Foundry and CPU business. Probably better if those % were Non-GAAP numbers. But that is another debate.
cushychicken 3y ago
Intel’s business model is heavily based on reinvesting almost all profits into research on a node that’s 3-5 years out. They’ve been betting the farm on delivering the highest performance chips on the market for the last 25 years. For many years, they were unopposed technically. Now, though, their technological advantage is starting to erode. Intel is in deep shit as a business. How much runway they have is anyone’s guess. But they’re in trouble.
amadeuspagel 3y ago
Margins are not determined by how many companies sell certain products, but rather by willing the individual buyer is to consider different products. Both Apple and Microsoft can charge high prices for MacOS and Windows, because most Mac and Windows users will not consider another OS. But most people who currently use a laptop with an Intel chip will consider a laptop with an AMD chip, and vice versa, even speaking of an Intel user or an AMD user feels wrong.
- RugnirViking 3y ago
  > Margins are not determined by how many companies sell certain products Rule 1: Margins are as large as a company can get away with them being Rule 2: The primary thing that brings down prices (thereby shifting consumer demand) is another company competing offering lower prices Rule 3: Fewer companies are able to maintain a unified front of higher-than-required margins for longer, owing to fewer individuals needing to agree to make the prsioner's-dilemma-esque status quo hold. Any one of them can take business from the others by lowering their prices, but at the cost of reduced margins for everyone (including themselves). Margin pricing in general is "sticky". When it goes down, its difficult for it to rise. That's why companies jump on inflation as an excuse to raise prices - usually much more than inflation. Similarly, see power prices in Europe after ukraine war - record profits despite attributing price rise to rising supply chain costs. Yes, this doesn't follow your economics 101. This is economics 102. As soon as there is an "excuse", companies make massive profits and margins rise. This will also cut into demand as price-sensitive consumers drop out. This is seen as fine. Sometimes, it is better to make more money from less work than grow less efficiently.
  - amadeuspagel 3y ago
    My economics 101? Your comment is a random rant that doesn't engage with my comment or with the broader discussion.
    - RugnirViking 3y ago
      it explains why typically markets with fewer players have higher margins. This is why competition is good (and also why the government has whole departments to consider whether mergers in sparse markets will hurt consumers)

by axlee 3y ago

bootloop 3y ago

I guess that is what competition brings to the table.

FredPret 3y ago

It might be that that's not as high of a barrier to entry as it seems. It would cost much more than that to replicate the engineering quality that goes into the Apple system of products for instance.

lotsofpulp 3y ago
Also, Apple has lots of products and services to lots of potential buyers it can sell to at lots of price points, whereas a fab owner only has a few buyers and therefore less negotiating power, plus all the buyers are sophisticated and well informed.

Guvante 3y ago

They made a ton of money not long ago. 30% in 2021 eye balling it. But all those factories have to be paid for no matter income. So if income goes down your profit margin goes to terrible.

chorsestudios 3y ago
This particular bump in sales might be attributable to the boom in computer sales resulting from COVID and the surge in WFH.

Scoundreller 3y ago

AMD is fabless since 2008/2009 (and sold its last stake in the subsidiary in 2012): https://en.m.wikipedia.org/wiki/GlobalFoundries https://en.m.wikipedia.org/wiki/GlobalFoundries

gary_0 3y ago

You're looking at the wrong company. TSMC has a margin of 40%.

jandrese 3y ago
And Intel has just been poorly managed for over a decade now.

asianometry 3y ago

I cannot speak to AMD, but for the case of Intel, it is hard to be a fast follower. The billion dollar factory translates to hundreds of millions of dollars of depreciation each year - a fixed cost that means declines in revenue hit the bottom line very hard.

dathinab 3y ago

While there are not many competitors, they still do (most times) properly compete due to various factors like pressure from their customer (some very very large with the capabilities to become a competition iff they stop innovating and/or become to expensive), but also factors like political pressure to stay ahead of mainland china. Through TSMC for example has margin >40%. Which isn't that surprising I mean there is not much competition. Intel doesn't (yet) provide their capabilities to anyone else, and the other competition is behind enough to not be an option for many things, especially high end and/or high efficiency. What is quite fascinating is that while TSMC is a close to monopoly(/duopoly if you count Intel) in many sectors and takes advantage of it they seem to have successfully resisted the common problem of such companies stopping/slowing innovation and similar problem. I'm not sure if it's related to the additional pressure of them being on of the main lifelines for Taiwan or if they have just pretty good management or if it's because they still competition oligopoly main customers do push them to do so.

chii 3y ago
i suspect that TSMC doesn't have as big a monopoly as you've made it out to be, not because intel is competing, but because the customers of TSMC are large enough that they "force" the innovation (aka, they "threaten" to not use them if they stop innovating). Also, TSMC hasn't been around long enough to become the slow behemoths that other big monopolies have become.
- hughesjj 3y ago
  I think it's just a matter of 'if you stop innovating, others will catch up quicker than you expect'. It's a continual r&d March, and you don't want to end up like Intel and get stuck on 14nm forever And Intel was a company that was still shoving billions into r&d, yet still got stuck So much of the tech industry has Moore's law baked into the supply chain forecasts, so lots of incentive to deliver on it.
- civilitty 3y ago
  TSMC doesn’t have a real monopoly, they’re just a few years ahead of everyone else in integrating ASML’s latest tech. Samsung and Intel aren’t very far behind. The more money TSMC charges the more incentive the others have to catch up but they can only move so fast. GlobalFoundries and STMicroelectronics seem stuck in the double digits. It makes a big difference to a few competitive customers so TSMC gets paid well for that first mover advantage, but yeah it’s not well secured monopoly.

ksec 3y ago

AMD they had amortisation assets with the Xilinx acquisition. Otherwise they are doing in the industry standard 20% margin if I remember correctly. Intel has been burning their cash to try and catch up in both Foundry and CPU business. Probably better if those % were Non-GAAP numbers. But that is another debate.

cushychicken 3y ago

Intel’s business model is heavily based on reinvesting almost all profits into research on a node that’s 3-5 years out. They’ve been betting the farm on delivering the highest performance chips on the market for the last 25 years. For many years, they were unopposed technically. Now, though, their technological advantage is starting to erode. Intel is in deep shit as a business. How much runway they have is anyone’s guess. But they’re in trouble.

amadeuspagel 3y ago

Margins are not determined by how many companies sell certain products, but rather by willing the individual buyer is to consider different products. Both Apple and Microsoft can charge high prices for MacOS and Windows, because most Mac and Windows users will not consider another OS. But most people who currently use a laptop with an Intel chip will consider a laptop with an AMD chip, and vice versa, even speaking of an Intel user or an AMD user feels wrong.

RugnirViking 3y ago
> Margins are not determined by how many companies sell certain products Rule 1: Margins are as large as a company can get away with them being Rule 2: The primary thing that brings down prices (thereby shifting consumer demand) is another company competing offering lower prices Rule 3: Fewer companies are able to maintain a unified front of higher-than-required margins for longer, owing to fewer individuals needing to agree to make the prsioner's-dilemma-esque status quo hold. Any one of them can take business from the others by lowering their prices, but at the cost of reduced margins for everyone (including themselves). Margin pricing in general is "sticky". When it goes down, its difficult for it to rise. That's why companies jump on inflation as an excuse to raise prices - usually much more than inflation. Similarly, see power prices in Europe after ukraine war - record profits despite attributing price rise to rising supply chain costs. Yes, this doesn't follow your economics 101. This is economics 102. As soon as there is an "excuse", companies make massive profits and margins rise. This will also cut into demand as price-sensitive consumers drop out. This is seen as fine. Sometimes, it is better to make more money from less work than grow less efficiently.
- amadeuspagel 3y ago
  My economics 101? Your comment is a random rant that doesn't engage with my comment or with the broader discussion.
  - RugnirViking 3y ago
    it explains why typically markets with fewer players have higher margins. This is why competition is good (and also why the government has whole departments to consider whether mergers in sparse markets will hurt consumers)