What Are "Fabless" Chip Makers?

Fabless chip makers are companies that produce semiconductors for use in various types of electronics, such as digital cameras, smartphones and the new technologically sophisticated “smart” cars. The term "fabless" means that the company does not manufacture the silicon wafers, or chips, used in its products; instead, it outsources the work to a manufacturing plant or foundry. Many of these foundries are located in Taiwan and China, where skilled labor is plentiful and cheap, which keeps production costs low and return on investment high.

During the technology boom of the 1970s, all top manufacturers of semiconductors maintained a vertically integrated business model: designing, testing and building the products they sold. Then, in the early 1980s, smaller manufacturers began to enter the marketplace, but strong barriers to entry meant that many of these companies were producing more chips than they could use. This surplus, combined with the continued growth of the semiconductor industry, led to the creation of the fabless business model. The first foundry, Taiwan Semiconductor Manufacturing Company, was built in 1987; as of 2015 it remains the largest independent manufacturer of silicon components in the world.

The fabless business model is popular in the semiconductor industry because it allows manufacturers to invest profits in research and development of new technologies while maintaining the high production volumes needed to maintain sales, which continue to grow. In 2014, global chip sales rose 7.9% to $339.8 billion, up from $306 billion in 2013, which marked a 5% year-over-year increase from 2012. The list of top-20 fabless chip makers worldwide includes four U.S. companies: Qualcomm, Broadcomm, AMD and Nvidia. Intel, which entered the foundry business in 2010 when it began selling its integrated circuits to the startup Achronix Semiconductor, still tops the list in overall semiconductor sales.