• November 29, 2022

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One of the biggest trends that nobody is talking about is the race by large companies to build custom microprocessors. This is how investors should play the idea.

Cruise Automation, the automated vehicle division of General Motors (GM) last week made a surprise announcement. The San Francisco, Calif.-based company is going to develop custom chips.

This is really bad news for Intel (INTC). Let me explain.

Semiconductors are a modern marvel. The idea something so small can also be so powerful is mind-blowing. Until recently processors got much smaller with each new generation, and even more powerful. That dynamic is changing.

Chips are still becoming more powerful, yet they are not getting much smaller. It’s a size thing. Processors can only get so small. To get more computing power out of silicon, chip designers are resorting to task specific silicon. And they are switching architecture.

That’s the angle Cruise is taking. The GM unit plans to have custom-made chips in 2025 for its automated vehicles. It might not seem cost effective to start building chips from scratch. There are off-the-shelf graphic processor units available from firms like Nvidia (NVDA). Most would draw the analogy to a car company making its own tires, except it is not quite like that.

Cruise isn’t making its chips, per se.

The company is designing, then contracting the production to a fabricator. A foundry, like Taiwan Semiconductor (TSM) is equipped with all of the specialized machines required to make state-of-the-art smart silicon. In theory, this cost could be recouped by scaling up production.

Kyle Vogt, chief executive officer, says Cruise will hit the custom chip sweet spot in 2025, when production of its Origin autonomous vehicle is expected to go into production. Origin isn’t much of a looker, however it is a full, personal AV, with no steering wheel or pedals. GM executives believe the transition deserves new thinking.

Car makers are trying to move away from dependency on traditional chip suppliers. The entire sector has been restrained since 2021 by ongoing chip shortages. Ironically, those shortfalls were caused by poor planning by the carmakers.

As the pandemic reached North America Ford (F), General Motors (GM), Toyota (TM) and other firms immediately began cutting orders for chips in anticipation of a slowdown in demand. Foundries switched production from older chips made for the automotive sector to next generation processors required by the consumer electronics sector. Automakers moved to the back of the line.

News that Cruise is designing chips is worrisome for mass scale, general purpose chip producers like Nvidia. However, the trend is lethal for Intel.

The San Jose, Calif.-based company is not only the largest producer of general-purpose chips, its entire business model depends on mass adoption of its x86 chip architecture. These processors are based on complex instruction set computing. As end users move to task specific chips, the larger trend is clearly away from CISC.

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Apple (AAPL) moved away from CISC last year with the introduction of its custom M1 chips for laptop computers and iPads. The MI licenses intellectual property from ARM Holdings, a British mobile tech IP firm. ARM chip designs use reduced instruction set computing (RISC) architecture.

Reuters reported in early September that Cruise only considered open source RISC and ARM-based architectures for its custom chips.

The trend is obvious, and ominous for Intel.

Shares of Intel have been under pressure since early 2021 when these trends became apparent. The company is trying to transition toward other markets, most notably national defense.

At its Innovate presentation in San Jose yesterday, the company introduced Ponte Vecchio, a GPU that will be used in a new government supercomputer. Intel executives hope that processor will also help the company win market share from Nvidia in hyperscale data centers.

There is no reason to believe that hope will be answered. Investors should steer clear of Intel shares. Its largest customers are turning away from Intel architecture. This trend is accelerating.

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