uploads///Series  A

Opportunities and Risks Associated with Nvidia’s Fabless Model

By

Jan. 14 2016, Updated 8:06 a.m. ET

Nvidia’s manufacturing process

In the previous part of the series, we understood how Nvidia (NVDA) achieves design wins from its customers. Let’s look at the manufacturing aspect of the supply chain. The manufacturing process involves wafer fabrication, assembly, testing, and packaging. As NVDA has adopted a fabless business model, it outsources all four activities to different suppliers.

While wafer fabrication is handled by NVDA’s two foundry partners Samsung (SSNLF) and TSMC (TSM), other activities are mostly outsourced to Taiwan (EWT), a leader in assembly, testing, and packaging. The above parties are also responsible for the procurement of a majority of the raw materials required to manufacture the products. However, Nvidia procures substrates from IbidenCo, Nanya Technology, and Unimicron Technology.

Article continues below advertisement

Benefits

The fabless model allows Nvidia to focus its resources on product design, R&D (research and development), marketing, and customer support. Moreover, it’s saved from the huge cost of maintaining and upgrading fabrication facilities, or fabs, and keeping them idle during the off-season.

Risks

Nvidia does not have full control over the manufacturing process, as it’s handled by third-party foundries. The company cannot control the quality and quantity of product, delivery schedules, or technology enhancements. This may lead to a delay in the introduction of new products and give rivals such as Intel (INTC), who run their own fabs, an edge. This is a technology chasm created by the fabless-foundry model.

Article continues below advertisement

Low yield could result either from failure in product design or in the manufacturing process. As the company does not have full access to fabs, it cannot gauge a yield problem until the product design is manufactured. Lower yields could hamper relations with customers, giving competitors an advantage to steal customers.

In December 2015, there was a supply shortage of Nvidia’s high-end graphics cards in the Asia-Pacific region, due to which the price rose 15%. However, the company has resolved the shortage, and prices have returned to normal.

Inventory management

The semiconductor industry faces the challenge of short lead times and quick deliveries. This requires companies to anticipate future demand on a product-by-product basis and maintain sufficient inventory to meet tight delivery schedules.

Nvidia maintains a significant portion of its inventory as semi-finished goods, which it can modify to be used across various processors to meet customers’ specific demands.

In the next part of the series, we’ll look at the risks faced by Nvidia due to its limited customer base.

Advertisement

More From Market Realist

  • Michelob Ultra beer
    Company & Industry Overviews
    AB InBev Is the Top Beer Brand Worldwide—Is It a Monopoly?
  • Businesswoman looking out a window
    Company & Industry Overviews
    Shifting Focus: Three Women Investing Funds in 2021
  • Aol logo on office building,
    Company & Industry Overviews
    What We Know About Apollo Global Management, New Owners of AOL and Yahoo
  • Chick-fil-A sign
    Company & Industry Overviews
    Why It Only Costs $10K to Own a Chick-fil-A Location
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.