Chip deal unraveled in nanosecond
Globalfoundries’ chipmaking decisions driven by a massive falling out with IBM
In May 2018, the Globalfoundries Fab 8 computer chip factory in the Saratoga County town of Malta appeared to be on top of the world.
Tom Caulfield, a longtime IBM executive who had taken over day-to-day operations at Fab 8 in 2014 and turned a struggling chipmaking operation into an industry success story, had been named CEO of Globalfoundries two months earlier, vowing to make the company profitable for its Abu Dhabi owners.
On May 7, 2018, Globalfoundries held a lavish luncheon and elaborate news conference at Fab 8, an event attended by Khaldoon Al Mubarak, the CEO of Mubadala Investment Co., as well as Yousef Al Otaiba, the United Arab Emirates’ ambassador to the United States. Fab 8 had nearly 3,300 employees at the time.
U.S. Rep. Paul Tonko was also in attendance, as well as Howard Zemsky, New York state’s top economic development official.
Al Mubarak was scheduled to meet with Gov. Andrew M. Cuomo at the Capitol after the luncheon and then fly to Washington, D.C., to speak with federal officials in meetings that were also attended by Caulfield.
The reason for the event at Fab 8 that Monday in May had been curious at the time. Globalfoundries had perfected its latest 14 nanometer chip under Caulfield’s leadership and was investing hundreds of millions of dollars in developing a more advanced chip based on 7 nm architecture that would be faster and more powerful than the 14 nm chips. The company seemed on the verge of becoming one of the leading chipmakers in the world.
But there had been leaks to the news media that Globalfoundries’ owners at Mubadala, an investment fund operated by the government of Abu Dhabi, was unhappy with all of the losses that the company had endured investing in research and development and was looking to possibly sell all or part of the company.
Caulfield and others didn’t expressly come out and say it that day in May, but Globalfoundries was looking to the
federal government to help subsidize its operations and put it on a more level playing field with chip giants in Asia that were far outspending Globalfoundries in the race to 7 nm chips.
If Globalfoundries was going to build another factory in Malta — Fab 8.2 — the company was going to need a federal lifeline, and it would have to be double that of the roughly $1.4 billion that Globalfoundries had received from New York state to build Fab 8 in 2010.
And then, after no apparent
success with the Trump administration, Caulfield abruptly announced that August that Globalfoundries was abandoning plans for 7 nm and laying off hundreds of workers at Fab 8 along with top scientists that led its 7 nm research program at Albany Nanotech, the stateowned facility that is home to SUNY Polytechnic Institute.
After the somewhat unexplained event at Fab 8 had ushered in so much optimism for Fab 8.2, the future of the factory seemed dim, although Caulfield always maintained that the dramatic shift in strategy would save the company by allowing Globalfoundries to focus on the mass chip market, which didn’t require as much of the research expenses that were dragging the company down and putting pressure on Mubadala to reconsider its investment.
Caulfield’s vision proved correct — Globalfoundries has since become profitable and has started again talking about Fab 8.2, albeit with federal subsidies being requested again. There is even recent talk of an initial public offering of Globalfoundries that would raise $30 billion — enough to fuel growth and also satisfy Mubadala.
But what no one outside of Globalfoundries knew back in 2018 when this was happening was that most of Globalfoundries’ decisions at the time were being driven by a massive falling out with IBM, which had sold off its chipmaking division to Globalfoundries several years earlier in a deal championed at the highest levels of government as a way to ensure New York would remain a powerhouse in chipmaking even as IBM decided to exit the business after receiving hundreds of millions of dollars in state support over the years for its Albany Nanotech research programs and its
East Fishkill chip fab, which Globalfoundries took over.
“This was the best possible outcome that preserves New York jobs and ensures that obligations made to the state are kept,” Cuomo said. “Globalfoundries and IBM are both world-class companies, and I look forward to working with them to continue New York’s rich legacy of innovation.”
But lawsuits filed this month by both companies against one another reveal that IBM’S deal with Globalfoundries to take over its East Fishkill fab and another fab in Vermont along with IBM’S vast intellectual property portfolio, was a failure almost from the beginning after the deal closed in 2015.
And many of Globalfoundries’ public moves in the years that followed — the splashy luncheon with Mubadala and the lobbying in D.C., followed by the decision to drop 7 nm production and cancel its research programs at Albany Nanotech — were in response to its behindthe-scenes dispute with IBM.
The deal, in which IBM agreed to give Globalfoundries $1.5 billion and its two fabs in exchange for a promise that Globalfoundries would manufacture IBM’S most advanced chips used in high-end servers and supercomputers for 10 years, appears to have fallen apart almost immediately.
IBM not only wanted Globalfoundries to make 14 nm chips but also next-generation 10 nm chips as well.
But according to IBM’S suit against Globalfoundries, IBM was never even happy with the 14 nm chips, and Globalfoundries backed out of making 10 nm chips only to make a failed attempt to develop 7 nm. IBM eventually had to turn to Samsung to make its 7 nm chips at a South Korean factory instead of
New York as had been expected.
“Although Globalfoundries eventually supplied 14 nm chips to IBM, Globalfoundries’ development and manufacturing efforts were delayed, plagued by quality problems, and never fully satisfied IBM’S needs or requirements,” IBM asserts in its lawsuit against Globalfoundries that was filed earlier this month in state Supreme Court in Manhattan.
As for backing out of making 10 nm and then 7 nm chips, IBM claims Globalfoundries never intended to make them even when it negotiated the deal, which was code-named “Project Next” by the two companies during secret negotiations.
“Making such a major shift in corporate priorities, and a major change in the allocation of billions of dollars in corporate resources, could not have happened entirely in the few months after the closing,” IBM’S suit states. “It would have required significant and timeconsuming thought, analysis, debate, market intelligence gathering, and financial calculations. It is not plausible that discussions and decision-making about such a material change in Globalfoundries’ strategic and technological direction only began for the first time after July 1, 2015 (date of the deal’s official closing).”
Globalfoundries paints a different picture, essentially arguing that IBM’S request for 7 nm chips was unrealistic since the move to the smaller size required a major leap in lithography technology used to etch chips designs on silicon. And at the time, it wasn’t working smoothly, and Globalfoundries was falling behind IBM’S timeline, which became unrealistic.
“Despite (Globalfoundries’) investment of over $1.5 billion to develop the 7 nm technology and despite placing hundreds of engineers on the 7 nm project, by August 2018 (Globalfoundries) knew that it would not be able to achieve a 7 nm prototype in a timely manner,” Globalfoundries’ lawsuit against IBM, also filed in Manhattan, asserts. “Development of the 7 nm technology was far more challenging and expensive than had been anticipated, which caused delays in reaching the project’s targeted milestones.”
Globalfoundries said it simply couldn’t afford the $10 billion in annual research spending that its competitors were allocating to move to 7 nm chips and beyond, and its attempts to get banks or the federal government to provide capital to perfect 7 nm chips failed.
Globalfoundries said it needed to spend $2.3 billion on research and billions more to upgrade Fab 8 in order to make IBM’S 7 nm chips. The money never materialized.
“Spending this additional money would have resulted in significant losses for (Globalfoundries) and risked the future of (Globalfoundries),” the lawsuit against IBM asserts. “With this backdrop, (Globalfoundries) made the difficult, but prudent, decision to cut its losses.”
IBM is seeking at least $1.5 billion through the lawsuit, in addition to “compensatory and consequential damages” that could significantly raise that amount if the company is successful at trial, although some sort of settlement would be more likely.
It’s unclear how much the IBM and Globalfoundries dispute will harm efforts by President Biden’s administration and U.S. Senate Majority Leader Charles Schumer to secure a
$52 billion semiconductor manufacturing subsidy package to combat China’s rise and the global chip shortage.
Globalfoundries actually believes it — and the U.S. chip industry is better off with Globalfoundries leaving the most advanced chips like those at 7 nm and beyond to others since it only accounts for 30 percent of the demand for chips.
“Our decision in 2018 to stop work on 7 nm enabled Globalfoundries to focus on the other 70 percent of the market, where we were making the biggest impact,” said Saam Azar, senior vice president of corporate development, legal and government affairs for Globalfoundries. “Had we not made that pivot, Globalfoundries may not have been viable. Flash forward three years to today, and Globalfoundries is a vital supplier of semiconductors to the U.S. and the world.”
Globalfoundries has said it would use the semiconductor funding — originally proposed in what was called the CHIPS Act — to build Fab 8.2. IBM is also planning to compete for $2 billion in related funds that would support a new federal computer chip research lab that IBM and New York state would build at Albany Nanotech.
The legal controversy is rare among the region’s high-tech and business community which typically does not publicly turn on one another.
“IBM depended on Globalfoundries after investing heavily in a long-term mutual relationship,” IBM said in a statement to the Times Union in response to this story. “Globalfoundries responded by taking IBM’S money, and benefiting from IBM’S knowledge, skill and assets. Though Globalfoundries repeatedly assured IBM that it would meet its commitments, Globalfoundries instead abruptly and without any justification walked away from
IBM.”
Azar called IBM’S allegations “sad,” adding that collectively, about 1,000 engineers from Globalfoundries and IBM had worked on the 14 nm and 7 nm chip projects, which cost billions of dollars. He added that the agreement was only an “efforts” contract, meaning that Globalfoundries would make its best effort to make the leap to 7 nm chips, within financial reason, a task he called “harder than rocket science.”