In the semiconductor industry, a fabless company specializes in the design, development and sale of semiconductor chips, but does not manufacture them. Rather than make the semiconductor chips themselves, fabless companies prefer to outsource chip building to a separate company that specializes this high-tech manufacturing. By using this type of business strategy, a fabless company is able to avoid the high costs involved with building and operating its own manufacturing facility and can instead devote the majority of its time and resources to research and development. Many of the products that consumers commonly use today in computers, music players and cell phones, for example, have been brought to market by a fabless company.
Even though many companies continue to design as well as manufacture semiconductor chips, simple economics make it easier for the existence of both fabless companies and manufactures that focus solely on building the actual product. That said there is still a market for companies to do both design and production in house. In fact, in some cases, a larger semiconductor company design and build its unique products and also manufacture chips for fabless companies.
The reason a fabless company can save money is due in large part to not having to finance and operate a manufacturing facility that comes with high overhead costs. Outsourcing production can allow it to come to market with a full line of products without as large an investment for ownership. The same can be said for the other side of this equation, where manufacturing facilities don't have to invest in research and development and can contract work from a large pool of companies designing new chip technology.
In the past, semiconductor chips were only sold by companies that designed and manufactured the devices themselves. These companies needed to invest in both semiconductor chip and manufacturing research and development. This dual involvement was necessary because the production of these devices required a precise understanding of the manufacturing process being employed.
The relatively recent standardization of micro-electronic circuitry has made it possible for a single manufacturer to produce devices for multiple companies using the same machinery. This standardization has significantly reduced the manufacturing cost of semiconductor chips. In turn, the lower cost of these chips has opened the doors of opportunity for many small start-up companies. A fabless company makes it possible for semiconductor chip developers to take their ideas from the drawing board to the marketplace with a relatively small initial investment.