Chapter 456 Red Letter Order, Black Letter Delivery

“Mr. Jiang, the price inquiry for Intel’s first chip, the 80286-12 (12.5MHz), has been sent.”

“Considering that we have passed their certification, the most important thing this time is probably the price.”

Although Zhang Shaohua is the head of Lingnan Semiconductor, he must still report to Jiang Hui when it comes to key matters.

The quotation for the first chip foundry is related to whether the deadlock in chip foundry can be broken in the future, so it is naturally of extraordinary importance.

“按照我了解的信息，1985英特尔80286-12（12.5MHz）的售价为 260美元。”

“But they also launched the 80386, which had better performance, and the price was around $300 at the time.”

“Of course, a few years later, the price of the 286 must have dropped to less than $200, or even less than $150.”

“And the price of 386 is estimated to be less than $250.”

“Under these circumstances, Intel outsourced the 286 to a foundry, probably because it wanted to focus on producing the 386 and other subsequent versions of the chip.”

“If we want to make a very competitive offer, the price must be less than $100, the lower the better.”

It is impossible not to engage in a price war at this time.

After all, it is the first product. If the price is not attractive, why would Intel find a foundry to produce it?

The price of chips is constantly changing every year.

When they are first launched, they are very expensive, but it is normal for the price to be cut in half after one or two years.

Jiang Hui does not want Intel to lose interest in Lingnan Semiconductor after this offer.

“This time, Intel’s offer is for a tiered price based on the production quantity.”

“The price of 20 chips produced by foundry is one price, and 40 chips is another price.”

“You can provide us with a maximum foundry order of 100 million chips.”

“We have made some preliminary calculations internally, and considering that the factory has just started mass production, the yield rate may not be very high.”

“If we want to break even, the price of a 286 chip has to be around $100.”

“To be conservative, around $120 is a safe bet.”

Zhang Shaohua first explained the situation to Jiang Hui.

The final decision must be made based on the actual situation.

As the head of Lingnan Semiconductor, Zhang Shaohua does not want the company to fall into a loss-making state.

This will put a lot of pressure on him.

“This price is too high. I think Intel must have also contacted TSMC to make an offer at the same time this time.”

“Compared with TSMC, we have no other advantages except cost.”

Jiang Hui is still very self-aware of the current situation.

It is impossible that just because you are a time traveler, you can really kill gods and ghosts when you meet them.

That is simply unrealistic.

For giants like Intel, the biggest attraction of chip foundry is its low cost.

Then we consider other things like reducing the investment burden.

Without the premise of low cost, everything else is meaningless.

“If we want to further reduce the price, we need to work hard in terms of yield rate, production efficiency and other aspects.”

“This will make it possible to further reduce the cost to less than $100.”

Zhang Shaohua must be reporting the situation truthfully to Jiang Hui now, and then see how to deal with it in the end.

“Red letters take orders, black letters ship.”

“If Lingnan Semiconductor wants to quickly enter the international chip foundry market and become the world’s largest chip foundry company, this policy must be implemented.”

“This is the only way to beat our competitors so that they have no chance to fight back.”

After Jiang Hui said this, Zhang Shaohua was stunned for a moment.

“Orders are accepted in red and shipments are shipped in black.”

This seems a bit difficult to understand?

“‘Red-letter order’ means that when an order is received, according to the normal budget and cost accounting, the price of this order may cause the enterprise to be in a loss-making state, that is, present a ‘deficit’.”

“This means that the order is accepted at a price lower than the expected cost or the average cost in the market.”

“In Japan, this practice is usually to win orders in the fierce market competition and to win customers by offering lower prices than competitors.”

“‘Black-letter shipments’ means compressing and saving costs by conducting all-round and refined cost control and efficiency improvement in all links such as manufacturing and management.”

“Ultimately, when we deliver goods to customers, we realize profits, turning our financial situation from loss to profit, and showing a ‘black ink’.”

“We don’t have anything else that is particularly attractive to Intel except cost competitiveness.”

“Then give them an offer they can’t refuse in terms of cost and get our equipment up and running first.”

Jiang Hui could naturally see that Zhang Shaohua didn’t quite understand what he said, so he explained it specifically.

After all, this will serve as the operating policy of Lingnan’s semiconductor foundry business for a long time to come.

In China today, many export orders are actually sold at a loss, in order to earn foreign exchange through exports.

But their loss-making sales are definitely not what Jiang Hui wants.

They have been losing money from the beginning to the end and have never thought about changing.

Anyway, the task of exporting and earning foreign exchange is their most fundamental task.

In this regard, Lingnan Semiconductor’s pursuit is definitely different.

Relatively speaking, the ultimate goal is to make the company profitable and continuously improve its technological competitiveness.

Exporting to earn foreign exchange is just a side goal.

“If the price is quoted at a loss, then the lowest price should be around $80.”

It is clear that Jiang Hui is very determined to get the order from Intel this time.

Zhang Shaohua did not hesitate any longer and directly quoted a more shocking price.

“But considering the tiered orders from Intel, I think we should quote $20 for 100 chips.”

“When they ordered 40 pieces, we quoted 90 dollars. Only when they gave us an order for 100 million pieces, our price was 80 dollars.”

When obtaining orders, the quantity of orders is naturally a very critical factor.

Otherwise, if it is just a small and insignificant order, then the significance would be very small.

Anyone who works in industry knows that there is a huge difference between large-scale batch production and small-scale mass production.

When Tesla entered China later, why were many three-electric related suppliers willing to supply them at very low prices?
Even traditional auto parts manufacturers such as springs and subframes are willing to supply at low prices?
That’s because Tesla’s two main models have very high sales volumes.

In the early stages of the development of new energy vehicles, the appeal to manufacturers was enormous.

For the same spring, the same manufacturer may quote Tesla a price 20% cheaper than other customers.

This is definitely an exaggerated statistic.

Normally, it is impossible for an auto part to have a 20% profit.

The reason why the price difference between the two customers is so large is that when the number of units is different, the production cost is very different.

For parts like chips that are more dependent on equipment, the impact on production is even greater.

“No problem. I’ll provide Intel with a quote based on your direction.”

“We will try to get this order as soon as possible and officially start production.”

“The factory has already started mass production. Only when the production capacity is fully mobilized can we enter the fast lane of development.”

Jiang Hui didn’t hesitate and finalized the quotation direction with Zhang Shaohua.

There is no need to drag this matter out.

“By the way, Mr. Jiang, in addition to Intel, several other customers including AMD and Motorola have been communicating with us recently.”

“It is estimated that personnel will be arranged to conduct an inspection in the future.”

“Intel will probably face some pressure by then, which will be good for our foundry.”

Zhang Shaohua is still quite confident about the future prospects of Lingnan Semiconductor.

Jiang Hui has determined to develop both chip design and production and chip foundry at the same time, which seems to be completely correct at the moment.

“These companies already had their own chip factories in the past, and now that they see Intel starting to do foundry business, they also want to learn from it.”

“But we should not only focus on these customers, but also consider actively expanding some customers.”

“Some chip companies were only established in the past few years, and they don’t even design their own chips yet. They rely on outsourced chips to assemble their products.”

“If we can make them fully aware of the benefits of chip foundry, perhaps the situation will be completely different.”

“More companies that are only responsible for chip design but not production will appear around the world.”

“More computer companies and other enterprises that originally did not consider making their own chips will also consider entering this field.”

“After all, with the emergence of chip foundry business, the threshold for chip production has been lowered a lot.”

“For example, Apple’s annual computer sales are not low.”

“But the various chips used in their computers are mainly purchased from Motorola.”

“If we can communicate with them, we can get them to consider designing their own chips and then leave the production work to us.”

“Maybe after Apple studies it, it will actually do this.”

“At that time, all the chips they purchased from Motorola will become our OEM orders.”

Jiang Hui has a relatively clear understanding of the future chip foundry market structure.

The number of chip companies today is simply incomparable to that in the future.

If Lingnan Semiconductor can make good plans in advance, it can definitely get the biggest piece of the pie.

Once chip companies get used to the chip foundry business, it will be basically impossible for them to invest in chip factories themselves.

After all, from the perspective of capital market returns, if you invest $1 million in chip design and then produce the product through chip foundry, you may eventually be able to directly obtain a profit of more than $5 million.

But if you want to produce chips yourself, perhaps the total investment may reach US$5 million in the end, but the direct profit may still be around US$5 million.

Obviously, this kind of data will not look so good in the financial report, and the stock price will be directly affected.

“Boss Jiang, I plan to set up a sales branch in America to expand our customer base there.”

“Through my investigations and contacts during this period, I feel that American chip companies are the most active in chip foundry business.”

“Japan, which is also a major chip producer, does not seem to have any interest in foundry business in its chip companies.”

Zhang Shaohua has obviously put in a lot of effort during this period.

We have a relatively clear understanding of the world chip market.

Jiang Hui fully agreed with his analysis.

Even in later generations, the main customers in the world’s chip foundry market are still the United States and China, and few companies in Japan choose foundry.

This situation can be explained by the views expressed within Hitachi Semiconductor when discussing the chip foundry business.

Not only Hitachi Semiconductor, but also Japanese chip giants such as Mitsubishi Semiconductor and Toshiba Semiconductor are actually part of a large group or conglomerate.

Although their operations appear to be independent, this is not the case at all.

All businesses are mainly developed around the group business.

In many cases, related R&D tasks are not based on the needs of external customers, but rather on the needs of the group.

In terms of system, their situation is completely different from that of the American semiconductor giants.

“No problem. In the next ten years, we will focus on expanding our American customers, and we won’t have to worry about our Japanese customers.”

“I feel like even if the cost of chip foundry is lower than their own production, no one will be interested in it in the short term.”

Jiang Hui directly asked Zhang Shaohua to give up the foundry business of the Japanese semiconductor company.

It is too difficult to expand their business.

The key is that there will be no good results in the end.

In the future, the semiconductor companies in the United States and even in Europe will have a larger chip foundry market than Japan.

“Okay, then I will focus on expanding the American market.”

Jiang Hui had given such clear instructions, so Zhang Shaohua naturally had no questions.

Soon, Lingnan Semiconductor officially submitted a quotation to Intel.

At the same time, TSMC received inquiries for Intel’s 80286 chip foundry business.

As a former senior executive of Texas Instruments, Zhang Zhong has extensive connections in the American semiconductor industry.

“Fan Chen, Intel sent the inquiry for this foundry business to both us and Lingnan Semiconductor.”

“This time the offer is critical. We must try our best to keep Lingnan Semiconductor out of the chip foundry market.”

“Otherwise, if every foundry business is to be competed by the two of us, it is very likely that the company’s profits will be greatly affected.”

Zhang Zhong called his right-hand man Zeng Fanchen to his office to discuss Intel’s new foundry business.

Some time ago, Zhang Zhong relied on his personal connections to help TSMC pass Intel’s certification, successfully obtained the first order, and started the chip foundry business.

Now facing the competition from Lingnan Semiconductor, he definitely takes it very seriously.

Today, Intel is still a world chip giant, and its every move will affect the entire chip industry.

Manufacturing chips for Intel also has a strong demonstration significance in the industry.

When other chip companies consider partners, they will definitely give priority to Intel’s foundry.

“I think so too, but the company has invested a lot of money in purchasing various equipment.”

“Our current production volume is not particularly large, and the cost amortized to each chip is not low.”

“Only by getting as many orders as possible can the situation be reversed.”

Zeng Fanchen is certainly not as good as Zhang Zhongmou in chip technology, but he is very experienced in management.

He has more say than Zhang Zhong on how to make a factory profitable.

“You are right, but the situation is actually the same for Lingnan Semiconductor.”

“And their labor costs are much lower than ours. In order to earn foreign exchange through exports, they may do anything.”

“This is very troublesome.”

Zhang Zhong has apparently done a lot of research on Lingnan semiconductors during this period.

Otherwise, he wouldn’t understand export and foreign exchange earnings so clearly.

“Mr. Zhang, do you think it’s necessary for us to contact BMW Technology in Hong Kong City directly to see if the two sides can discuss strategies to avoid bargaining with each other?”

Zeng Fanchen is not particularly confident that he can beat Lingnan Semiconductor in terms of price.

So I couldn’t help but come up with another trick.

He had come across many actual cases of similar tactics before.

“No, once Intel knows about this, the impact will be huge.”

“It is very likely that it will directly affect the development of the chip foundry industry, and the other party will have various ways to make us go bankrupt.”

Zhang Zhong immediately rejected Zeng Fanchen’s proposal.

However, he also felt Zeng Fanchen’s pressure from this matter.

So after thinking about it, I added my thoughts, “We will quote based on 0 profit this time.”

“Normally, our yield rate and production efficiency are higher than Lingnan Semiconductor.”

“In this case, our production costs are definitely lower than Lingnan Semiconductor.”

“If we can’t get an order even with 0 profit, then this order is meaningless to us.”

“During this period, several chip giants such as AMD have also begun to arrange personnel to contact us.”

“The chip foundry market will still be very broad in the future, and we don’t necessarily have to grab every order.”

“Strategically giving up one or two orders with low profit margins is also a way for the customer to have an explanation to the internal department.”

“After all, from the perspective of procurement strategy, no one wants to have only one supplier in any field.”

When a company is first established, everything is very flexible.

Zhang Zhong originally wanted to discuss with Zeng Fanchen how to get this order from Intel, but as they talked, he ended up comforting Zeng Fanchen that he didn’t need to be particularly concerned about every order.

He also pushed his subordinates too hard, which ruined the situation and made it difficult to do business in the future.

Simply competing on cost is not what he wants to see.

The direction he wants to develop is to continuously improve his technical level and rely on technology to get orders.

“I understand. I will organize people from various departments to discuss and see what the lowest cost of this OEM business can be.”

“If I still can’t get orders this way, I will personally lead the sales team to develop other customers.”

“The company has invested so much, and we can’t put all our eggs in one basket.”

After hearing what Zhang Zhong said, Zeng Fanchen breathed a sigh of relief and the pressure in his heart was no longer so great.

Soon, TSMC also submitted its quotation to Intel.

……

“Otellini, have you seen the chip foundry quotes from TSMC and Lingnan Semiconductor?”

As Intel’s CEO, Grove did not ask the purchasing director, but instead called the technical director Otellini to his office.

Obviously, this time the offer is a bit unusual.

“I looked at it and the price was much lower than I thought.”

“No matter which foundry is responsible for production, as long as it is implemented, it can contribute at least an additional profit of nearly $1 million to our company next year.”

“When the time comes, the company’s stock price will rise even more.”

Otellini is now more enthusiastic about chip foundry.

If most chip production is handed over to foundry manufacturers in the future, then their technical department will be mainly responsible for chip design.

The workload can be greatly reduced, or more energy can be focused on the research and development of new products.

This will allow Intel to maintain its technological leadership.

“But don’t you think Lingnan Semiconductor’s offer is too low?”

“The price quoted for a chip is only $80, which is more than half lower than ours.”

“This is simply unimaginable.”

Grove knew that the chip foundry business could reduce chip costs, but he did not expect the reduction to be so great.

“Lingnan Semiconductor must be very eager to get our order this time, so it quoted a very low price.”

“Comparatively speaking, TSMC can only do $100 at the lowest, which is a big difference.”

“But no matter which party’s price is much lower than ours, which means that our original model is indeed more expensive.”

After O’Donnell said this, Grove did not deny it.

Intel has a 1968-year history since its establishment in 20.

The scale of the company is getting bigger and bigger, and naturally there are a lot of expenses.

Especially since the semiconductor industry has developed rapidly in the past decade, there has been more poaching among different companies.

Therefore, the welfare benefits provided to employees are getting higher year by year.

In addition, some R&D costs for new products will also be amortized to the chip cost.

So the final calculated cost is quite high.

“Since chip foundry has advantages, we will let foundries produce our old chips in the future.”

“This time Lingnan Semiconductor has passed our verification and its price is competitive, so let’s give them a chance.”

With Grove’s decision, Lingnan Semiconductor’s efforts finally paid off.

Soon, this news spread in the industry.

(End of this chapter)