Intel Corp. (INTC:US) has signed Cisco Systems Inc. (CSCO:US) as a customer for made-to-order networking chips, landing the biggest customer yet for its fledgling foundry business, two people with knowledge of the matter said.
Under the arrangement, Intel will manufacture processors designed by Cisco, the largest maker of routers and switches, said the people, who asked not to be identified because the deal is private.
Cisco is already a buyer (INTC:US) of chips that are designed and manufactured by Intel, the world’s largest semiconductor maker. The new orders represent a vote of confidence in Intel’s effort to expand into the $30.7 billion market for making processors according to other companies’ specifications. If successful, Intel’s push would step up pressure on Taiwan Semiconductor Manufacturing Co. (2330), the top producer of made-to-order chips.
“One thing that Intel knows how to do well is manufacturing; they are the best in the world at that,” Daniel Amir, an analyst at Lazard Capital Markets, said in an interview. “They are ahead of TSMC.”
Chuck Mulloy, a spokesman for Santa Clara, California-based Intel, declined to comment.
“Cisco has a long-standing relationship with Intel,” said Karen Tillman, a spokeswoman for San Jose, California-based Cisco. “The company is one of several strategic suppliers of silicon to Cisco. However, Cisco does not comment on the specifics of its relationship with suppliers.”
Becoming a contract manufacturer is one way Intel might seek to offset a slump in its main personal computer chip business, as consumers put off PC purchases in favor of smartphones and tablets. Intel, which reports fourth-quarter earnings later today, has reported profit declines as it slows down plants to burn off stockpiles of unused chips.
“Given that their growth is slowing down, they’ll have this capacity that could be available for other uses,” Amir said.
The only companies that have announced plans to hire Intel to make products they design are Tabula Inc., Achronix Semiconductor Corp. and Netronome Systems Inc., three small designers of programmable logic and networking chips, Mulloy said.
Intel’s management has faced questions from analysts about whether it would be better to make chips based on other companies’ designs, rather than keep trying to sell its own designs for new markets, such as smartphones, where it has largely failed to win orders.
Chief Executive Officer Paul Otellini has described Intel’s interest in the foundry industry as being at the first stage in a “crawl, walk, run” progression, according to Mulloy.
Intel rose 2.6 percent to $22.68 at the close in New York, leaving the shares (INTC:US) up 10 percent so far this year.
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