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Intel To Manufacture for Apple? If so, It's a Bad Industry Omen

An Intel (INTC) executive heated speculation over whether Intel and Apple (AAPL) might be in discussions about outsourcing manufacturing for the latter's iPhone and iPad chips. Intel CFO Stacy Smith said that "a product that involves your IA (Intel architecture) core and put some of my IP around it ... would be fantastic business for us." And well it might, especially as Apple and its current manufacturing partner, Samsung, are locked in legal disputes on the smartphone and tablet front.

All-things-Apple titillation aside, however, there's a more interesting story that many are ignoring. Unlike many other companies in the semiconductor industry, Intel hasn't typically chosen between designing chips or manufacturing them. It is one of the last companies with its own fabrication plants. For Intel to consider manufacturing for others says a lot about the state of the industry:

  • The future doesn't look bright in PCs.
  • Even a giant like Intel has a challenge making technology investments pay off enough.
  • Chip manufacturers have a new major competitive threat.
For decades, Intel has had volume on its side, even as most other chip companies got out of the manufacturing business. Even AMD sold off its fab plants. The reason Intel has kept making its own chips is pure economies of scale. The volume it has traditionally done is enough to keep plants busy.

Utilization, or the amount of time a plant is producing product, is a key metric in the capital-intensive semiconductor business. Fail to push enough chips out the door and you can't amortize the billions in investment necessary to manufacture over enough volume to make the per-chip price competitive.

That's why the industry split into two parts: companies that created designs and manufacturers that would turn those designs into parts that third parties could use in their products. Intel has been one of the very few exceptions because a constantly growing demand for PCs and servers meant that the company could continue implementing new semiconductor technology and still see returns on their investment. Even if it had some excess capacity, why would it want to lend its advanced manufacturing know-how to potential competitors?

And Apple is a major competitor, given that the iPhone and iPad use ARM chips that run on a non-Intel architecture, and such devices reduce the need among many for PCs. There are only three reasons Intel would take the business:

  1. It hopes to learn something about making better low-power mobile chips from the process.
  2. The potential revenue is a big temptation.
  3. Intel anticipates falling utilization because of changes in consumer and corporate buying habits.
The first reason isn't realistic, because there would be too many restrictions on what Intel could do with knowledge it gained. Revenue is always tempting, but Intel is a massive company that has a long planning horizon. Falling utilization is the only explanation I see that becomes strategically compelling.

Not that Intel is about to find its plants idle today. But the company will be focused on trends over the next few years, and business-as-usual no longer exists. That's why president for Intel China Sean Maloney said that Intel will focus on chips that consume almost two-thirds less power than its mainstream chips. It's why Nvidia will focus on tablet and smartphone chips, rather than on graphics chips that could work alongside an Intel device in a desktop or laptop PC.

It's just the beginning. Expect lots more change from Intel and others, as they try to turn with the future of consumer electronics.


Image: Intel
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