Business Strategy and Accounting Basics
Compared with an IDM (integrated device manufacturer), which manufactures in its own fabs, which is a typical characteristic of a fabless company?
- ABecause it has many tangible fixed assets such as manufacturing equipment, fixed costs such as depreciation weigh heavily when fab utilization falls, and profit tends to drop sharply
- BBecause it has no fabs, its tangible fixed assets and fixed costs are relatively small, and the cost of outsourcing manufacturing to foundries is mainly a cost that varies with production volume
- CBecause manufacturing is outsourced, it spends almost nothing on R&D for product design and development
Show answer and explanation
Answer: B. Because it has no fabs, its tangible fixed assets and fixed costs are relatively small, and the cost of outsourcing manufacturing to foundries is mainly a cost that varies with production volume
A fabless company specializes in design and sales and outsources manufacturing to foundries, so it does not bear huge fab investments or their depreciation itself. Its share of fixed costs is therefore low and its break-even point tends to be relatively low, so its profit tends to fall less than an IDM's when demand drops. On the other hand, because it cannot secure manufacturing capacity in-house, securing foundry capacity when demand suddenly rises becomes a challenge, and it sometimes reserves production capacity through long-term contracts.
- A. This is a characteristic of an IDM with its own fabs. Fabs have large fixed costs, so utilization strongly affects profit.
- B. Correct. It needs no fab investment, but instead pays for outsourced manufacturing.
- C. A fabless company competes on its design capability, so its R&D burden is, if anything, large.
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