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IBM becomes low-cost chip power

Which company poses the greatest competitive challenge for Intel?

Which company poses the greatest competitive challenge for Intel in the processor market? Advanced Micro Devices? Cyrix?

Try IBM, which makes chips for both of these companies and more.

A good argument can be made that Big Blue is building a large chip portfolio based on low-cost architectures to challenge industry leader Intel in the coming years.

This week, IBM announced that it will begin to make low-cost, low-power processors based around designs from Advanced Risc Machines (ARM) and act as a contract manufacturer for Integrated Device Technology which designs very-low-cost Intel-compatible chips.

"There is definitely something going on," said Dean McCarron, principal analyst at Mercury Research. "They are enjoying the foundry business and are equipped to do microprocessors."

IBM Microelectronics also makes Cyrix chips and is slated to start producing AMD's K6 processors this year. Both of these chip lines are featured in low-cost Intel-compatible computers from manufacturers such as the IBM PC Company and Compaq Computer.

On top of this broad, low-cost chip portfolio, Apple computer gave a much publicized demonstration of a new generation of high-speed, copper-based PowerPC chips designed IBM yesterday at the Seybold conference in New York. These chips are expected to hit the market by next year.

McCarron and others are quick to point out that IBM is not trying to position itself for head-to-head competition against Intel. Instead, Big Blue appears mostly to be on a mission to keep its semiconductor manufacturing operations running at maximum capacity. Owing to a variety of circumstances, this has led the company to manufacture more microprocessors.

In effect, however, IBM is underwriting much of the low-cost processor industry by offering a formidable chip-manufacturing infrastructure to a host of companies like IDT that need this kind of critical support.

In addition, Intel clone manufacturers are in many cases cutting deals with IBM to get around other problems. For instance, IDT likely signed with IBM to avoid obstacles involving Intel, as IDT does not have a license to manufacture Intel-compatible chips, said Peter Glaskowsky, an analyst with MicroDesign Resources. Its WinChip microprocessor was developed through reverse-engineering. IBM is allowed to make chips, and the license will extend to any chips the company makes for IDT.

"IDT is capable of making more chips than they will sell," he said. "They can make IBM their preferred source for microprocessors, especially for customers who are worried about the licensing issue."

AMD, on the other hand, signed a deal under which IBM will make K6 chips later this year. Most observers said AMD pursued the deal because the company has had difficulty producing chips in its own plant. IBM's manufacturing is considered state of the art.

Using IBM as a contract manufacturer further obviates the need of a chipmaker to risk billions in building plants on its own. IBM has been making Intel clone chips for Cyrix for years, becoming instrumental in getting that company into accounts with such PC giants as Compaq.

Although Cyrix manufacturing is switching over to the plants of parent company National Semiconductor, it is unclear whether Cyrix will break off the IBM relationship, McCarron said.

For its part, Big Blue is shifting toward microprocessors because it pays better than memory chips, which used to fill the foundry. "They are weaning themselves from the DRAM side," said Ashok Kumar, semiconductor analyst at Piper Jaffray.

The volume of Intel clones coming out of IBM will remain very low in comparison to Intel's output, said Michael Slater, founder of MicroDesign resources. IBM charges a premium for its foundry services, which will motivate all three manufacturers to keep as much of their chip production in-house. All three manufacturers have also continually fallen short of their sales goals for various reasons.

Still, by selling factory capacity to the clone vendors, IBM is giving these players a leg up in the game.

"If all goes perfectly for Intel's competitors, all of them will ship 20 to 25 million units compared to 80 million from Intel. IBM will only make a fraction of those," Slater said. Still, he added, "it's a challenge in the sense that Intel is likely to lose some market share on the low end."

The licensing deal with ARM could result in more direct competition. In February, Intel announced it would manufacturer StrongARM microprocessors, a variant of the ARM chip that the company acquired from Digital Equipment. Potentially, IBM and Intel will be targeting the same clients.

The "copper" PowerPC chip that debuted Monday probably won't begin to make an impact until next year, but IBM is already aggressively lobbying for market acceptance of its copper-based technology.

Chips made with copper conduct electricity better than aluminum, the metal traditionally used for microprocessors, and allow the chip size to be reduced. Eventually, IBM will be able to make processors with speeds of up to 1,000 MHz (1 GHz) using the copper process.

Copper chips will start to emerge this year, IBM spokesman Bill O'Leary said. The copper technology will appear first in custom-made ASICs chips and later in microprocessors.