Intel Corp will develop its low-cost chips for ultra-small laptops with Taiwan's TSMC for a range of electronic devices, helping both firms expand into new markets amid a deepening global recession.

Intel has long insisted on making its own microprocessors, but is increasingly bringing in partners to help it tackle new markets and boost its product range. There was market speculation Intel would outsource the production of chips to trim costs as demand dries up.

The world's top chip maker said on Monday it plans to put its Atom -- the brains of ultra-small laptops -- on single chips that behave like an entire computer, a computer on a chip.

But Intel stressed it will not transfer its highly prized manufacturing process technology to TSMC.

Some analysts said Intel might be trying out TSMC before embarking on more full-fledged outsourcing. Neither company provided targets, specific products, or timeframes for their tie-up.

For them to come to the decision to outsource manufacturing of any product that they design is a monumental change in their mindset, said Patrick Wang, a Wedbush analyst. Intel could be testing the waters with TSMC.

Intel has been keen to expand beyond personal computers into the rapidly shifting world of gadgets but it has in the past been frustrated in its efforts, PiperJaffray analysts wrote in a note issued on Monday.

Roping in TSMC could open new markets for Intel much more quickly than the chip giant could do on its own. And the agreement validated TSMC's leading portfolio of intellectual property and manufacturing capability, analysts said.

Intel will port its Atom processor cores to TMSC's technology platform.

It's the right choice. Intel has to bow to the reality that they're not good at everything, said Hans Mosesmann, an analyst with Raymond James.

It's more of an acknowledgment that the way we (Intel) hoped to do this is not going to work out.

NEW GADGETS

Intel will let the world's biggest contract chip maker make newly developed Atom-based chips for gadgets such as smartphones, set-top boxes and cameras, boosting volumes at the Taiwanese foundry at a time sales are shrinking in a downturn.

TSMC said the new chips will also be used in other products, including low-cost netbook laptops and Mobile Internet Devices (MIDs), which are basically handheld computers that support the complete range of Internet applications familiar to PC users.

It is good for TSMC in the longer term but TSMC is likely to start making the chips from the fourth quarter or early next year at the earliest, BNP Paribas semiconductor Eric Chen said.

The foundry market seems to have hit bottom but we don't expect to see a significant recovery in the second quarter, so maybe we have to wait until the second half.

It is believed that a wider customer base and larger economic scale would allow TSMC to be an early beneficiary from the next upturn in the industry.

Intel's shares fell 3.4 percent and TSMC's US-listed stock shed 1.2 percent while the Nasdaq market lost 4 percent.

By 0415 GMT on Tuesday, TSMC's Taipei-listed shares had fallen 0.3 percent in a broader market down 0.7 percent.

Analysts said investors were holding off because of the lack of details. Piper Jaffray estimates Intel and TSMC won't begin to take in revenue from their collaboration till 2010.

DOWNTURN

Global chip sales plummeted 29 percent in January to $15.3 billion, according to the Semiconductor Industry Association.

Longer term, analysts said Intel -- lacking the requisite in-house technology to stake out a big footprint in fast-moving consumer electronics -- was making the right decision.

Intel is spending heavily to shift its technology into next-generation 32-nanometer manufacturing, while simultaneously trying to shave costs to preserve margins.

The company plans to shut plants in Malaysia and the Philippines and its one surviving factory in Silicon Valley, cutting as many as 6,000 jobs.

At the same time, it plans to spend $7 billion over two years to build next-generation, 32-nanometer chip manufacturing capacity.

Intel has maintained it will manufacture its own microprocessors, though it had previously outsourced some processes, including chipsets and wireless devices, to TSMC and other foundries.

Intel also has a joint venture with Micron Technology to produce NAND flash memory chips used to store data in digital cameras or cellphones.

But as the cost of chip manufacturing has skyrocketed, many peers, including graphics chip maker Nvidia, have migrated to fabless or fab-lite strategies.

The deal is also new for Intel, said spokesman Chuck Mulloy.

Manufacturing an Intel core other than at Intel is something that has not happened before. For the first time, Intel is transferring the design technology to a third party.

(Editing by Gary Hill and Anshuman Daga)

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