IBM Sues GlobalFoundries, Highlighting Outsourcing Challenges

I worked with IBM legal in my early years as an IBM employee. IBM tends to use litigation defensively. They have decades of experience writing contracts that are exceedingly difficult to break because of their deep expertise and a well-founded belief that a firm contract prevents litigation. 

This month, IBM  filed a civil lawsuit against GlobalFoundries, a company that it helped to found. The lawsuit alleges that GlobalFoundries breached a contract by not producing promised high-performance microchips. The complaint is similar to one AMD, who just moved to TSMC and is also a founder of GlobalFoundries, raised. Dissatisfaction with Global Foundries’ two largest initial customers, one leading to significant litigation, doesn’t bode well for the firm.

Process Technology Failure

Process Technology is a large part of what defines winners and losers in the microprocessor space. Generally, the more advanced the process to make the processors, the more efficient those processors become. And, the market can pivot away from a company having process problems to favor one that has been able to make the better and newer processors work. 

If you can’t, as a supplier, keep up with critical technology in your chosen field, you likely won’t remain a supplier for long. On the other hand, if all you can do is build increasingly out-of-date technology, your market will eventually leave you behind, which appears to be the phase that GlobalFoundries has entered. 

Not providing the latest process technology is a huge problem, particularly when a competitor like TSMC seems to be having little trouble with it. But this is arguably worse.

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Litigation is a Red Flag

When companies consider partners for mission-critical work, litigation with existing significant partners is a huge red flag. AMD’s disgruntled departure was terrible enough because it showcased GlobalFoundries’ inability to meet the needs of one of its founding partners. However, AMD was able to find an alternative and didn’t litigate.

IBM’s action indicates IBM not only depended on Global Foundries strategically, but also anticipated future needs that they contracted GlobalFoundries to meet. According to the filings, IBM alleges that GlobalFoundries both misrepresented their capabilities and unilaterally changed the deal, doing IBM massive damage. 

Both actions speak to trust. They imply you can’t trust GlobalFoundries with mission-critical tasks — a severe problem as firms tend to avoid suppliers that have multiple high-profile issues with significant customers. Either AMD or IBM’s actions would have been problematic, but both suggest the competent manager should avoid GlobalFoundries like the plague. 

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GlobalFoundries May Be Unviable

Both AMD and IBM exited the manufacturing process for microprocessors, giving that capability to GlobalFoundries, who implicitly agreed to provide the same services at an attractive price. However, GlobalFoundries has now been unable to meet those commitments bringing into question the premise that created the company. If GlobalFoundries can’t meet the needs of the companies that contributed their manufacturing capabilities to found the companys, then the viability of its existence comes into question. 

Had AMD and IBM known that GlobalFoundries couldn’t or wouldn’t execute, they likely would have looked for another solution that could meet their future needs while lowering their fixed overhead. They might have even decided to partner with each other more tightly and pooled their manufacturing capabilities. 

Rethinking Outsourcing

GlobalFoundries was created with the idea that companies like AMD and IBM could, more cost-effectively, contract out microprocessor manufacturing. Unfortunately, that core assumption now appears to be wrong, which places a significant cloud over GlobalFoundries because it goes to the core of that company’s existence. Given the pandemic has many companies rethinking outsourcing manufacturing, this is yet another indication that, at least for strategic parts, keeping manufacturing in-house may be the more prudent path. 

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