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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Fabless Company

What it is:

A fabless company is a company that designs, develops and markets but does not manufacture silicon wafers. "Fab" is short for "fabrication." Fabless facilities do not have fabrication facilities.

How it works (Example):

For example, let's say a group of technology experts have some ideas on how to make silicon wafers that are shaped in a way that will make semiconductors run 50% faster.

The group of tech experts is good at wafer and semiconductor design, but the group is not good at running and managing manufacturing facilities. Additionally, it does not have the large amount of capital required to open a manufacturing facility.

Accordingly, the tech experts decide to form a fabless company. They open an office in which they develop, design and market their wafer design but they outsource the actual manufacture of the wafers. They do this by signing an agreement with another company's fabrication facility to manufacture their designs.

Why it Matters:

Fabless companies are much like many other companies that develop, design and market -- but do not actually manufacture -- their own products. Everything from cell phones to pots and pans, to clothes, dog houses or furniture are made this way, and this allows these companies to focus on bringing new, innovative products to market. In turn, it also allows companies to avoid the high capital investments associated with manufacturing facilities and the resources needed to manage those facilities.