Fabless Company

What Is a Fabless Company?

The term "fabless company" alludes to a company that plans and markets hardware while outsourcing the manufacturing of that hardware to a third-party partner.

The term is usually utilized comparable to advanced chip planners, who hold the intellectual property (IP) for the chips they sell. Renowned models include Apple (AAPL), NVIDIA (NVDA), and Qualcomm (QCOM).

How Fabless Companies Work

Fabless companies arose due to the way that the companies that foster the IP for new chip plans and different forms of advanced hardware are ordinarily settled in developed countries in which the cost of labor is generally high. Thus, fabricating the hardware in-house through an in an upward direction integrated supply chain could demonstrate uneconomical, leading to depressed margins and less capital accessible to fund further research and development (R&D).

Hence, numerous effective companies have decided to re-appropriate the creation of their hardware to dedicated manufacturing firms. These companies are much of the time situated in countries with lower labor costs, in which nearby fabricators have developed extensive experience and skill in this form of particular manufacturing.

With regards to chip manufacturing, the companies that practice just in fabricating the chips — without developing their own IP or marketing the final result — are regularly alluded to as "chip foundries." The largest such company is the Taiwan Semiconductor Manufacturing Company (TSM), which controls generally 52% of the global market and produced almost $35 billion in incomes in 2019.

Today, the cost of developing another factory that could hope to contend with a laid out player, for example, TSM could cost upwards of $10 billion. When combined with the generally low operational costs of the laid out foundries, this barrier to entry makes a critical incentive for fabless companies to continue outsourcing their manufacturing cycle.

True Example of a Fabless Company

The United States is home to probably the best fabless companies in the world, a large number of which are internationally dominant in their particular markets. For instance, Qualcomm is a $100 billion fabless company that holds a huge portfolio of IP relating to semiconductors, particularly those geared toward mobile telephones. Its incomes, which came to almost $24 billion as of September 2020, are substantially derived from the royalty streams earned on its IP licensing agreements.

NVIDIA Corporation is one more prominent illustration of a fruitful American firm employing the fabless business model. A specialist in graphics processing unit (GPU) technology, the company currently holds IP in areas like mobile telephone central processing units (CPUs), chipsets for motherboards, hardware and software for professional graphics perception applications, and different software products for both commercial and customer facing applications. Similarly as with every single fabless company, NVIDIA's business model depends in large part on incomes from its IP portfolio and unions with highly sophisticated manufacturing partners.

Highlights

• A fabless company is one that creates and holds IP while outsourcing the manufacture of its hardware.
• The term is ordinarily utilized in the computer hardware market to allude to advanced semiconductor manufacturing.
• This business model allows fabless companies to benefit from decreased labor costs and economies of scale, while focusing on the ongoing development and adaptation of their IP portfolios.