What kind of love-hate relationship is going on between former allies IBM and GlobalFoundries?

On June 7, local time, GlobalFoundries filed a lawsuit with the New York Supreme Court, asking the court to rule that the company did not owe IBM $2.5 billion for violating a 2014 acquisition agreement. GlobalFoundries pointed out in the lawsuit that IBM claimed that it had violated the agreement and claimed $2.5 billion, and even threatened to take legal action.

On June 8, IBM formally sued GlobalFoundries for breach of contract in the New York Supreme Court on the grounds that GlobalFoundries failed to successfully develop a 7nm process.

The former partners have now become enemies, and what kind of entanglement is there between them? It all started with GlobalFoundries' acquisition of IBM's wafer foundry business in 2014.

GlobalFoundries takes over

As early as 1988, IBM established a 200mm production line in Vermont, USA; in 2001, it established a 300mm R&D line in East Fishkill, and the following year invested more than US$2.5 billion to build the world's most advanced 300mm wafer manufacturing production line.

However, the wafer foundry business accounts for less than 2% of IBM's overall revenue, and as IBM's own products have been marginalized, its wafer foundry revenue has been declining. In 2013, IBM's wafer foundry division had sales of $1.4 billion and a pre-tax loss of $700 million. In the first six months of 2014, its sales were $600 million and a pre-tax loss of $400 million. On the other hand, with the development of the process, the R&D expenses invested are also increasing, which forces IBM to withdraw from the wafer foundry market as soon as possible.

IBM then planned to sell some of its old wafer fabs, but failed to find any buyers. In the end, IBM paid $1.5 billion to sell its old chip production lines to GlobalFoundries. The latter was originally AMD's wafer division, which was spun off in 2009 and then found ATIC, an investment fund of a Middle Eastern oil tycoon, to establish GlobalFoundries.

The two parties reached an agreement in 2014, and some of the terms that were made public are as follows:

1. GlobalFoundries acquires two IBM foundries, East Fishkill and Essex Junction;

2. GlobalFoundries acquired approximately 5,000 design and management personnel from the two IBM factories and promised not to lay off employees;

3. GlobalFoundries acquires IBM's portfolio of approximately 16,000 patents and patent applications;

4. GlobalFoundries becomes the exclusive supplier of IBM Power processors and provides 22nm, 14nm and 10nm technologies to IBM (later 10nm is changed to 7nm);

5. IBM agreed to pay GlobalFoundries $1.5 billion over the next three years to invest in 14nm and 10nm processes and to bear an additional $3.2 billion in write-offs.

It is worth noting that the deal was "dead in the water" over price. GlobalFoundries initially insisted on a $2 billion subsidy, while IBM was only willing to offer $1 billion. However, as IBM was very keen to sell the wafer fab, the deal was eventually closed at a subsidized price of $1.5 billion.

Controversy

The win-win agreement at the time unexpectedly became the "fuse" of future disputes. The focus of IBM's accusation of breach of contract by GlobalFoundries was that GlobalFoundries failed to successfully develop the 7nm process.

In a statement provided to EE Times, IBM said, “GlobalFoundries’ counterclaims are intended to conceal its fraud and willful breach of contract, including in the development and supply of high-performance semiconductor chips. IBM subsidized GlobalFoundries $1.5 billion to obtain next-generation chips, and GlobalFoundries abandoned IBM after receiving the last payment and sold the assets for its own benefit.”

It is worth noting that GlobalFoundries decided to skip 10nm and go directly to 7nm considering the competitive situation in chip manufacturing. GlobalFoundries said IBM also agreed with this decision.

According to IBM's lawsuit, GlobalFoundries shared with IBM the timeline for the 7nm process in the fall of 2016, which was to start testing in the second quarter of 2017, trial production in the first quarter of 2018, and mass production in the third quarter of the same year. In addition, GlobalFoundries repeatedly told IBM that the 7nm chips it developed would be sufficient to replace the 10nm chips promised in the contract.

In light of this, IBM cut a check for the last $250 million of the $1.5 billion in cash it had pledged as part of the foundry shift and said it had invested at least $188 million to help GlobalFoundries develop 7nm by 2017, as GlobalFoundries was working to improve the performance of the 14nm process used in its Power9 and z13 chips.

After acquiring IBM's foundry business, GF's R&D progress did not seem to be smooth. First, the 14nm process was delayed, and then the 7nm process fell far behind TSMC and Samsung. In August 2018, GF announced that it would indefinitely stop investment and R&D in the 7nm process and focus on the existing 14/12nm FinFET process and 22/12nm FD-SOI process.

Regarding the end of the 7nm process, GlobalFoundries pointed out in a lawsuit filed on June 7 that the company has invested billions of dollars to develop cutting-edge chip manufacturing technology (far more than the $1.5 billion in subsidies from IBM), but feels that IBM's chip manufacturing plan is a "failed strategy" and decided not to continue. It notified IBM in 2018 and the two parties parted ways.

In addition, GlobalFoundries also stated that the development of cutting-edge chip technology is more challenging and costly than originally imagined. They have spent a lot of money to catch up with Samsung and TSMC, but still lag behind their competitors.

For GlobalFoundries, it makes sense to stop investing in cutting-edge processes that burn money. IBM has to look for a new foundry, which is the key to the company's claim against GlobalFoundries. This has affected the company's Power processor development schedule, so it has to turn to Samsung.

GlobalFoundries believes that turning to Samsung is actually beneficial to IBM because IBM will be able to obtain production capacity from Samsung when its 7nm products are fully competitive.

Timing of litigation

It’s been almost six years since GlobalFoundries skipped 10nm process development, and nearly three years since it stopped 7nm development, and as IBM is phasing out its Power9 and System z15 servers, it is no longer as dependent on GlobalFoundries as it was in previous years.

Meanwhile, there have been recent reports that GlobalFoundries is working with Morgan Stanley to prepare for an IPO with a valuation of $30 billion. IBM's intention to file a lawsuit at this time is indeed intriguing.

According to GlobalFoundries, IBM has not accused GlobalFoundries of any breach of contract since 2018, and the two companies have not communicated about this. In this lawsuit, GlobalFoundries suspected that IBM deliberately interfered with its upcoming IPO. GlobalFoundries also stated that IBM has not provided any substantive explanation for its alleged violations, and that IBM's legal department's claim of $2.5 billion is absurd, misleading and impure.

However, according to eetimes, Jim McGregor, an analyst at US technology consulting firm Tirias Research, said: "The timing is really not suspicious. GlobalFoundries has achieved profitability last year. It may be argued that if GlobalFoundries continues to insist on researching its cutting-edge technology with potential problems, the company may continue to lose money and will not be able to compete with other chip foundries, which is also bad for IBM."

From the current perspective, the two companies are arguing over the content of the original agreement and whether it has been violated. Jim McGregor pointed out that theoretically, if the contract includes that GlobalFoundries will provide relevant technology to IBM at key nodes, then IBM's claim is legal. The company did provide GlobalFoundries with semiconductor-related equipment, related intellectual property rights and US$1.5 billion.

Conclusion: IBM and GlobalFoundries have gone from being "allies" in the past to "fighting" today, which is really sad. It is still unknown whether the two sides will reconcile, but there will be no winner after the gun is fired. It may have a certain degree of impact on the technology, economy and feelings of both parties, and it will also become a textbook case of the deterioration of foundry cooperation relations.