IBM Sues GlobalFoundries Highlighting Outsourcing Challenges
I worked as an IBM employee at IBM Legal in my early years. IBM tends to use litigation defensively. They have decades of experience writing contracts that are extremely difficult to break due to their deep expertise and a deep belief that a solid contract prevents litigation.
This month, IBM filed a civil lawsuit against GlobalFoundries, a company it co-founded. The lawsuit alleges that GlobalFoundries breached a contract by failing to produce promised high-performance microchips. The complaint is similar to an AMD who just switched to TSMC and is also a founder of GlobalFoundries. Dissatisfaction with Global Foundries’ two largest launch customers, one of which has resulted in significant litigation, bodes ill for the company.
Process technology error Technology
Process technology is a big part of what makes winners and losers in the microprocessor space. In general, the more advanced the process of manufacturing the processors, the more efficient these processors become. And the market can turn away from a company with process problems in favor of one that is able to get the better and newer processors working.
As a supplier, if you can’t keep up with critical technology in your chosen area, you probably won’t stay a supplier for long. On the other hand, if all you can do is develop increasingly outdated technology, your market will eventually leave you behind in what appears to be the stage GlobalFoundries entered.
Not having the latest process technology available is a big problem, especially when a competitor like TSMC seems to have few problems with it. But that’s probably worse.
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Litigation is a red flag
When companies are considering partners for mission-critical work, litigation with existing significant partners is a big red flag. AMD’s disgruntled departure was horrific enough because it demonstrated GlobalFoundries’ inability to meet the needs of one of its founding partners. However, AMD found an alternative and did not go to court.
The actions taken by IBM show that IBM was not only strategically dependent on Global Foundries, but also anticipated future requirements that GlobalFoundries was tasked to meet. According to the records, IBM alleges that GlobalFoundries both misrepresented its capabilities and unilaterally changed the deal, causing massive damage to IBM.
Both actions speak for trust. They imply that you cannot trust GlobalFoundries with business-critical tasks – a serious problem as companies tend to avoid suppliers who have several high profile problems with significant customers. Either AMD or IBM would have been problematic, but both suggest that the manager in charge should avoid GlobalFoundries like the plague.
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GlobalFoundries can be unprofitable
Both AMD and IBM stepped out of the microprocessor manufacturing process and gave that capability to GlobalFoundries, who implicitly agreed to offer the same services at an affordable price. However, GlobalFoundries has now been unable to meet those commitments, which calls into question the premise from which the company was born. If GlobalFoundries cannot meet the needs of the companies that created their businesses with their manufacturing capabilities, the viability of its very existence will be called into question.
If AMD and IBM had known GlobalFoundries couldn’t or wouldn’t run, they would likely have looked for another solution that could meet their future needs while reducing their overheads. They might even have decided to work more closely together and bundle their manufacturing capacities.
GlobalFoundries was founded with the idea that companies like AMD and IBM could outsource microprocessor manufacturing more cheaply. Unfortunately, that core assumption now appears to be incorrect, which is casting a significant cloud on GlobalFoundries as it goes to the very core of this company’s very existence. Given the pandemic that is causing many companies to rethink manufacturing outsourcing, this is another indication that in-house manufacturing might be the more prudent path, at least for strategic parts.
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