Capital spending in the information technology sector has more than doubled during the past decade, primarily due to the cost of making semiconductors and building cloud-computing networks, according to an analysis by S&P Global Market Intelligence.
The information technology companies with the highest capex for the 12 months ending March 30 were Intel Corp. at $16.16 billion; Microsoft Corp. at $14.75 billion; and Apple Inc. at $8.74 billion. Each represents a different business model with different spending drivers as the companies seek to stay competitive.
Intel has always had to spend big to build the new facilities it needed to produce smaller, more powerful chips, but its manufacturing capabilities have fallen behind the pace set by contract chipmaker Taiwan Semiconductor Manufacturing Co. Ltd. TSMC's 7-nanometer and 5-nanometer chips are fueling growth for Intel rivals Advanced Micro Devices Inc. and NVIDIA Corp.
Intel's capital expenditures rose quickly during 2019 while it was trying to expand capacity to end shortages that were causing problems for its equipment manufacturing partners, noted Linley Gwennap, president and principal analyst at the Linley Group, a research firm focused on the semiconductor industry.
Intel's expenditures spiked from $3.55 billion during the second quarter of 2019 to $4.67 billion for each of the last two quarters of that year but then dropped during 2020. Intel reported capital expenditures of $3.41 billion for its most recent quarter.
While Intel announced in July that its next-generation 7-nm chip would be delayed, it is unlikely that the company's costs will decrease anytime soon, analysts said.
Expanding capacity for the 10-nm chips Intel currently sells — which the company must do as it attempts to convince equipment partners that its 10-nm chips are just as good as TSMC's 7-nm — will likely force Intel to expand the capacity of its existing fabrication plants, Gwennap said. It also could lead Intel to add new facilities at a cost of $10 billion to $12 billion apiece, though outsourcing some advanced chips to TSMC may help rein in the cost for Intel, the analyst added.
Apple Inc. has been able to avoid most of the chip-manufacturing costs incurred by Intel by partnering with TSMC. Apple designs its own chips for iPhones, iPads and other Apple products. But it buys the most advanced chip sizes available in such volume from TSMC that it subsidizes what it costs the contract chipmaker to build enough capacity to meet Apple's requirements, Gwennap said.
Apple's capital expenditures have been steadily falling in recent quarters, from $2.78 billion the quarter ended in December 2019 to $1.57 billion in the company's most recent period.
Meanwhile, Microsoft Corp. boosted its capital expenditures significantly over the past decade as it evolved from a software company to a major cloud-platform provider. In 2006, when Microsoft was beginning to look more closely at the cloud business, it reported capital expenditures of $1.6 billion. That figured had ballooned to $14.75 billion for the 12 months ending March 31, 2020, as the company continued to spend to build data centers and expand its cloud network capacity.
There is almost no way to get around the need to spend big for a company like Microsoft, which is competing with Amazon Web Services for share in a growing market dependent on data centers and related network infrastructure, said Melanie Posey, a research vice president at 451 Research, a division of S&P Global Market Intelligence.
"The big hyperscale companies are all about building massive infrastructure to support everything," Posey said. That is unlikely to abate during the COVID-19 pandemic, as many more people are dependent on cloud network capacity to support working and learning from home, she said.