Intel's contract manufacturing business has suffered a setback after tests with chipmaker Broadcom failed, three sources familiar with the matter told Reuters, dealing a blow to the company's turnaround efforts.

The tests conducted by Broadcom involved sending silicon wafers - the foot-wide discs on which chips are printed - through Intel's most advanced manufacturing process known as 18A, the sources said. Broadcom received the wafers back from Intel last month. After its engineers and executives studied the results, the company concluded the manufacturing process is not yet viable to move to high-volume production.

Reuters could not determine the current relationship between Broadcom and Intel or whether Broadcom had decided to walk away from a potential manufacturing deal.

"Intel 18A is powered on, healthy and yielding well, and we remain fully on track to begin high volume manufacturing next year," an Intel spokesperson said in a statement. "There is a great deal of interest in Intel 18A across the industry but, as a matter of policy, we do not comment on specific customer conversations."

A Broadcom spokesperson said the company is "evaluating the product and service offerings of Intel Foundry and have not concluded that evaluation."

Intel's contract manufacturing business was launched in 2021 as a key part of Chief Executive Pat Gelsinger's turnaround strategy.

Broadcom is not a household name but makes crucial networking gear and radio chips that helped generate $28 billion in overall chip sales in its last fiscal year. It has benefited from the boom in spending on artificial intelligence hardware, and J.P. Morgan analyst Harlan Sur estimated it will bank $11 billion to $12 billion from AI this year, up from $4 billion last year.

Some of its chip sales are from agreements with companies such as Alphabet's Google and Meta Platforms to help produce in-house AI processors, which can include arrangements with a manufacturer, such as Intel or Taiwan Semiconductor Manufacturing Co.

Crucial setback

As part of a disastrous second-quarter earnings report that shaved more than a quarter from the company's market value, Intel announced a 15% job cut and a reduction in capital spending related to its factory construction. Gelsinger and other executives will present a plan to the board of directors in mid-September on possible cuts to business units and teams to reduce costs, Reuters reported on Sunday.

Intel has committed to about $100 billion of expansion and new factory construction at several sites in the U.S. A crucial part of the company's expansion includes attracting big customers such as Nvidia or Apple to fill up capacity at all its new sites.

Intel reported a $7 billion operating loss for the foundry business, wider than the $5.2 billion in losses the year earlier. Executives expect the contract chip business to achieve breakeven in 2027.

Typically fabricating an advanced chip requires more than 1,000 separate steps inside a chip factory, or fab, and takes roughly three months to complete. Production success is determined by the number of working chips on each silicon wafer. Achieving a substantial yield is crucial to move to producing the tens of thousands or hundreds of thousands of wafers demanded by big chip designers.

Broadcom's engineers had concerns with the viability of the process, the sources said. Typically that refers to the number of defects on each wafer or the quality of the chips fabricated.

For an advanced manufacturing process used by TSMC, the Taiwanese giant charges roughly $23,000 per wafer at high volume, according to two sources familiar with wafer pricing. Reuters could not determine Intel's wafer pricing.

TSMC declined to comment on its wafer pricing.

Moving a chip design from a manufacturing process used by a company such as TSMC to another vendor such as Samsung or Intel can take months and requires dozens of engineers, depending on the complexity of the chip and the differences in manufacturing technology.

Betting on a new manufacturing process such as Intel's 18A is impossible for some smaller chip companies because doing so would require resources they do not have. Intel released its manufacturing tool kit for its 18A process to other chipmakers over the summer, Gelsinger said on an earnings call last month.

The company plans to be "manufacturing-ready" by the end of this year for its own chips and begin high volume production for external customers in 2025, Gelsinger said. At an investor conference last week, he said there are a dozen customers "actively engaged" with the tool kit.