March 4, 2002 9:00 PM PST

Intel to make optical chips for others

In a departure from its usual business practices, Intel will design and manufacture optical chips for other companies as it continues its march into the communications business.

The Santa Clara, Calif.-based chipmaker has effectively begun to lease its intellectual property and manufacturing muscle in the field of photonics, which is the integration of functions typically handled by optical fiber into silicon chips, said Rama Shukla, general manager of Intel Photonics.

"We can transfer and manipulate the light on a silicon wafer," he said, adding that these services "will bring down the production costs of black-box, handcrafted manufacturing" that characterizes the optical field.

The new effort marks both an extension of and a departure from Intel's current strategies. For the past three years, the company has aggressively moved into the market for communications chips and since the beginning of 1999 has acquired 36 companies for about $11 billion. Its most recent acquisition was Templex Technology, which designs precise photonic light filters.

Optical could represent a ripe opportunity for the company because of the finicky nature of optical components. Filters, amplifiers and other devices that exist to control the flow of light--measured in photons--are made one at a time. By contrast, several could be produced simultaneously on a silicon wafer.

"This will allow them to do customized components, which is what is traditionally required, but allow them to use (mass) production techniques," said John Lively, director of components and semiconductors at research firm RHK. Silicon will also likely reduce the price and size of optical equipment because various components can be integrated into a single chip.

The photonics venture, however, differs from most of Intel's projects in that the group won't develop products for Intel. Instead, it will serve as a full-service outsourcing center for other companies, similar to LSI Logic.

"There are a whole range of requests," Shukla said. "Some customers just want a multiplexer. Some customers want that to be coupled with attenuation capabilities."

Some customers will also likely choose to license intellectual property from Intel, and then have their chips manufactured by other foundries such as Taiwan's TSMC.

Historically, that's a significant shift for Intel, which has typically kept its intellectual property to itself. CEO Craig Barrett and other executives have said that the company doesn't have a strong interest in serving as a semiconductor foundry for third parties.

Custom jobs
For photonics, however, Intel has shifted its approach because of the state of the market, Shukla said. Right now, most optical-equipment manufacturers require fairly customized chips known as ASICs. Although photonics eliminates a substantial portion of the black magic that's involved in making optical components, the industry is still far from being a standards-based business. To gain customers, therefore, Intel has to sell itself as a services house at this stage.

"The industry is not mature enough to have the horizontal supply chain model," he said. "It really is an ASICs service."

In a similar fashion, both Nortel Networks and Lucent Technologies have spun off their component divisions. Intel made the first moves into this area when it began to offer chip design services on a limited basis last fall.

A key element to Intel's strategy is its familiarity with silicon. The company employs vast numbers of engineers versed in material sciences and has extensive manufacturing facilities--two factors it says can help it reduce the cost or advance the performance in its products. Last week, for instance, the company announced it would begin to manufacture more of its high-end communications chips in-house. Currently, many of these products, acquired through acquisitions, are made by outside foundries.

The photonics group, which contains about 100 employees, is working out of an existing Intel lab in San Jose, Calif. The machinery and tools required to create photonic semiconductors are the same used to make microprocessors several years ago, Shukla said. A lot of the machinery was used to make processors a number of years ago and is being recycled for the photonics effort.

Though the idea is attractive on paper, it also won't be easy, Lively said. Photonics remains a relatively new field. The total market opportunity also may not be large enough to offset the costs associated with silicon manufacturing, which generally requires large up-front investments in equipment and buildings. Optical-chip volumes are measured in the thousands, not millions, of units.

"The problem with (silicon manufacturing) is that it does offer low costs if you have high volume," he said. "The optical high volume is not high."

 

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