MUNICH, Germany — The outsourcing contract with STMicroelectronics is a first success for Globalfoundries. It is remarkable in that the company was able to attract a major player in the semiconductor company as a foundry customer faster than expected. It however might not be enough to make Globalfoundries independent from AMD as its major customer — and not enough to make it competitive in its new business segment.

It seems to be a win-win situation: Globalfoundries has its first customer, and ST has secured elbow room for growth over the next couple of years. The deal targets sophisticated low-power wireless and consumer devices — exactly the market place where currently the demand is growing. For a global chip vendor as diversified such as STMicroelectronics it is obvious that the ability to dispose of a variety of manufacturing partners offers greater flexibility, and for GF the contract means not only money in the pocket but also the recognition by one of the major players among its potential clientele.

However it does not mean that Globalfoundries is already out of the woods. Analysts such as Malcolm Penn from semiconductor market researcher Future Horizons do not believe that it will be enough just to get microprocessor orders from parent company AMD and filling up the remaining capacity with orders from third parties.

Even if the STMicroelectronics assignment would be large enough to keep the utilization up far enough — which is far from being clear for the time being — it would not suffice to guarantee the company's competitiveness. "Scale means cost and cost means price and price means competitiveness," Penn describes the practical constraints of the foundry business. While he admits that Globalfoundries just like its most prominent competitor TSMC are playing in the same league in terms of technology, they certainly are not comparable in terms of scale. "Globalfoundries' problem is that they need to be ten times as big as they are," Penn says.

A factor that attenuates the necessity to be big is the leading-edge technology position. But this position is an elusive feature; within a very short time span anybody who believes to be at the leading edge might find himself outdated by faster-moving competitors. And, ironically, while a position at the technology leading edge offers the chance to be profitable without being big, only a certain size creates the financial fundament to get at that leading edge.

So for Globalfoundries the ST contract is a start, not a place to rest. The company must continue to attract more customers — if possible, customers of a similar size and market position as ST. The good news is that with such a reference customer this quest might become a bit easier. But, as Buddha said: Every journey begins with the first step.

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