Most ARM CPUs are manufactured not by ARM itself but by Samsung, Qualcom, Texas Instruments and the like. These guys certainly do have all the requisite capacity as they provide the silicon for all of the world's mobile phones.
Granted, the Big Gorilla is faster to shrink the processes, because they have no problem dropping a few billions on a brand-new fab, but what good did that do? On both supposed benefits of the smaller process (cost and power drain / performance) ARM CPUs are still winning.
This whole situation is a replay of the Pentium 4 Megahurtz madness. Back then Intel was pushing raw performance disregarding power consumption, then they hit the heat dissipation wall, AMD snuck in from behind and punished them in a major way with Athlon-64. Intel regrouped with Core* series, won back the market share, pushed AMD back into oblivion, and relaxed about the whole thing. Now they are doing the same thing - prioritizing performance at the cost of power drain, and this time it will be ARM who will punish them. It's not clear how long it will take Intel to change their ways this time. The last time they still had Pentium 3 / Pentium M group of engineers to lean on, and that they did rather well. This time they are not so lucky - they have actually sold off their embedded CPU division a few years back, and now I doubt whether there is anyone left inside Intel to insist on a much needed pivot.
[EDITED for typos]
Not quite. With the exception of Samsung, those companies design ARM-based systems-on-a-chip, but do not manufacture them. They take an ARM core, perhaps modify it, add on a bunch of other stuff like graphics accelerators, memory controllers, ethernet MACs, and so on. Then once the design checks out, they send it to another company, like TSMC, UMC, or GlobalFoundries, that actually does the manufacturing.
The capital costs of building each new generation of chip fabs have grown tremendously, which led to this centralization and commoditization of chip manufacturing. Intel is one of the few holdouts, and they're usually a bit ahead of everybody else, which is one of their big competitive advantages.
I'd be really surprised if Intel isn't looking pretty good come this time next year.
Their best-in-industry process is actually sort of a problem for them, because they need those billions they dropped to translate into high margins. Which means they need their fabs to be making Xeons, not Atoms.
Or to put it another way: it isn't clear that mobile CPUs can pay for expensive fabs, which means the cheaper fabs in Taiwan have an advantage. Intel more or less admitted this when they ported the Atom to TSMC's process.
But then the question becomes: is an Atom made at TSMC better than an ARM made at TSMC?
And I didn't know about Atom/TSMC deal, so thanks for pointing that out: http://arstechnica.com/hardware/news/2009/03/atom-cant-feed-...