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Apple's iPhone chip salvation is close at hand

Summary: Apple's dominance in mobile and the anticipation surrounding the rumoured iPhone 5 can't guarantee it supplies of essential chips. Fixing that problem will need more than just money: it'll take the right friends.

It doesn't matter how good the iPhone 5 turns out to be: Apple can't sell it if it can't build it. It's not alone: this is the cold equation facing many mobile device manufacturers in the coming months, as supply problems dog the chip manufacturers.

How can Apple stay ahead in the mobile game and ensure a steady chip supply?

The riskiest products are the highest-performance smartphones and tablets, which drive new chip technologies — and are thus most susceptible to the delays that blunt the cutting edge. It's a rare point of vulnerability for Apple, which relies on massive sales of top-end products and likes very much to maintain absolute control over its supply chain.

Nobody doubts Apple wants to lock down its own chip supplies. It has more options than most. For example, the company has been shopping for semiconductor expertise over the past few years, leading some to suggest it may go as far as setting up its own silicon foundry.

These are insanely expensive: Taiwanese company TSMC has spent nearly $10bn (£6.3bn) on its latest plant. Apple has enough cash to buy anything it likes — but it can't change the laws of semiconductor physics. If it decided to build its own fab from scratch, it would be at least three to five years before it came onstream, and to be competitive, it would have to be cutting edge.

Existing chip companies find that hard enough, even with decades of experience, and the next stage in chip production — sub-20nm geometries on 450mm wafers — is doubly challenging. Starting up under those conditions would be like starting a space programme with a manned mission to Jupiter.

Other options

Its existing relationships aren't ideal, either. One major supplier is Samsung, which has to hurt. Other suppliers like TSMC are keenly aware that while Apple is the biggest company in the world, the mobile market is bigger yet, and they aren't prepared to sacrifice other customers in exchange for the Cupertino billions. That's despite it claiming that it has largely fixed its own 28nm fab problems and should be able to meet demand by the end of the year.

Apple's ideal chip partner would be one already leading the pack in fab but one without a major mobile presence

Another option would be to work with the Chinese government, which has already invested heavily in chip fabs and would doubtless be delighted to cut a very favourable deal with Apple in exchange for gaining access to competitive production techniques. That wouldn't solve the problems Apple would face in starting up its own fab, though, and partnerships with authoritarian regimes come with risks all their own.

There are other caveats. The chip industry, and in particular the mobile market, is a vast and thorny thicket of cross-licensing, patent barriers and other IP issues. And, once you've built your own chip fab, you lose a lot of flexibility: it's a lot easier to switch suppliers if you need to change course, than to turn your own supertanker around.

So Apple's ideal chip partner would be one already leading the pack in fab but one without a major mobile presence. It would be one with lots of key intellectual property, and masses of experience in working with the networking, storage and processing techniques that stitch together modern IT. It would be sweeter still if that partner had recently cooled on a long-term relationship with one of Apple's major competitors.

And if that partner was just 10 miles away from Cupertino, just the other side of Ponderosa Park, in — say — Santa Clara... well, that would be just perfect.

Topics: Apple, Intel, iPhone, Mobility, Processors

Rupert Goodwins

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  • Interesting

    But the chances of Intel letting Apple have access to their latest fab facilities to make ARM chips is almost zero. In fact, it is zero. Intel wants to get in on the mobile game, I don't see them just willingly giving their most powerful weapon to a company that will probably never use their chips in their tablets and smartphones.
    Jeff Kibuule
    • Interesting...Yes...

      So, the Father company of all innovation :ROLL-EYES) now needs to go hat in hand to Samsung, whose expanding the Austin, TX. chip facility by $4 billion dollars, or hope they can make up the difference in smaller companies or by exporting even more work to China... Nice job Apple! Aren't you glad you own rectangles now???
      George Leon
      • Um... Deal's long done?

        There's no hat in hand here- from retina mac pros to iphones, apple is a key contributor to samsungs annual profit.

        I don't get this article? The deals are long done and the phones made... If we are to believe they are hitting users in just a month, they aren't looking for manufacturers or putting the last tweaks on it, they're making the adds and finalising 3rd party contracts while the phones travel around the world by the container load, we're talking millions of devices.

        Of course supply contracts can always be cancelled and new suppliers added if the original parts supplier doesn't meet the contract, but this isn't the retina mac- they'll launch with sufficient numbers to flood the market.

        Also i know it's been done to death but they didn't win on the rectangle part... Don't let your bias against a company stand in the way of the facts. I've said it before, but they are all as bad as each other and none of them are your friend, they make pretty little things to make money, simples!
        • Wrong..

          Apple represents just 5%, repeat, 5% of Samsung business. It has already being analized that they could terminate their relationship with Apple if they need to.
          • Oops!

            Looks like you may have read the start of the post, but not the end; blind fanboying is to be deplored.

            We all love our tech here, it's why we stop by, and many of us have preferred brands, OS, or device type, however if you take a blinkered approach to tech, really will only result in you missing out on some cool gear. Again there is no big cuddly tech company, only business companies. If you don't want to use google because of data collection or Apple because of closed ecosystem that's fine... But blindly shouting in the dark just means you miss out; off the top of my head I have an iPhone, a nexus 7 and a macbook air with windows, ubuntu and PC-BSD on it with me 90% of the time I'm out for longer than it takes to get milk

            Now down to business; I'm not sure how you've calculated the value of Samsung's business, but I can assure you that Apple annual contracts are far, far less than 5% the value of that. In terms of revenue to Samsung, apple's 2012 contracts are actually expected to account for between 8-9% of Samsung's cash revenue for the year, making them the biggest individual customer, second to HP, which generates around 3% of Samsung's revenue.

            Now it is impossible to calculate accurately how much of that $2.1Bn from Apple is pure profit to Samsung, without getting our hands dirty in their accounts, but i think it is safe to say that as they posted $5.9Bn operating profit through Q2 this year they can indeed afford to keep going without apple as a customer.

            However in business, cutting your biggest customer because you don't like the guy is right up there with drinking methylated spirits for breakfast on the sanity scale. When it emerged that apple were looking into diversifying their RAM chip supply in the future, as well as A6 alternate suppliers, it wiped $10Bn off the market value of Samsung.

            In short, yes neither company will shut their doors if they ditch the other, but Samsung is the best supplier for Apple in terms of quality and quantity right now- a replacement just can't build the numbers to meet the demand yet, and Samsung would be bonkers to terminate such lucrative contracts - both for revenue and market price - they have shareholders too don't forget.

            All this brings me nicely back to my first point - don't pick sides; samsung controls 33% of the smart phone market with Apple coming in second at 19%... they are big boys and can look after themselves, why not just enjoy what they make?

            They both make fantastic products, and after all isn't that what affects us?
          • Maybe the directors of apple have not read.....

            How to win friends and influence people! Currently they are embarking on making enemies of several major companies some of which have close relationships with companies not directly involved.

            Apple may represent 5% - 9% of Samung's business - hardly surprising when you consider the size of Samsung across all their products. The main question is what percentage of Samsung components go into Apple products. This is not taking sides because I do not know the answer to that one. Just correcting the more important statistic. I should be honest and declare an interest in almost any company in opposition to Apple but I am asking a question here not giving opinion.
    • I don't think he's suggesting Intel make an ARM device

      More likely Apple move to an Intel Medfield design and I don't see why Apple would say no.
      If anyone can do it it'd be those 2. It lets Intel get into the mobile market--and not in a small way. Apple will have something different than the ARM players--potentially better. Apple is already on x86 for their PCs.
      Sure you can argue ARM is more power efficient right now but no darn way Intel can't destroy it in a year.
      Intel won't compete in the rounded icon corner or bouncy icon market at all--they have no interest--it
      • Dream on oh clueless one!

        ARM has been around for many years, and changing chip architecture isn't easily done. Guess what happens to all the application written for the previous chip architecture?
        • Virtual machines are all the rage with the kids these days

          It'll run in a virtualized layer like Rosetta until Apple deprecates it in a few years?

          Apple's changed their mac core processor architecture twice now. They're getting pretty good at that, for sure. If the new chips are powerful enough, running a virtualized version of the old architecture shouldn't be too much fo a challenge.
          Eric Oehler
          • That could be a huge mistake

            iDevices run pretty solid right now and that is what people depend on. If the switch to a new chip (however it is accomplished) resulted in a lesser degree of operation it could cripple the momentum Apple has built up for its devices.

            There isn't a clear winner yet in this new market and anything could be the event that eliminates a player or propels them into the lead position.

            It might be a moot point since Apple will have to make changes to OSx and iOS to become one operating system at some point or another. Microsoft is already there with windows8 and Android will make the jump to desktops in the near future.
      • Actually That's Exactly What He's Suggesting!

        But it's a ridiculous assumption, just because Intel holds an ARM license. When Apple no longer does and that's exactly why they rely on Samsung's own indirect licensing to avoid paying double royalties. Why license ARM chip Production when you can't even fabricate them yourselves? Why do you think Apple assumes they're covered under Qualcomm's Samsung SEP licenses?

        Furthermore just remember it's Apple that said they wouldn't pay what Samsung was demanding back in 2010. That when their problems started. After letting IBM Chip Wiz Mark Papermaster get away to AMD by firing him. For what??? For telling Steve the Truth about his External Antenna Design, that turned into AntennaGate. You don't think Mark Papermaster wasn't pissed about that?

        So next we have Mark coming back after the Genius behind DEC StrongARM, PA PWRficient Processor Project... Steve KILLED! ......now the genius behind the AMD Intel Killer x86 64bit processor is out of Apple and it's simply having him redesigning Samsung's Hummingbird Processor (A4, A5x). Now AMD has a BIG BRIGHT BANNER OUT FRONT!


        Yeah.... what the heck is Apple going to do now without him? You can buy people for sure, but YOU simply can't buy that kind of legacy and genius at visualizing data pathways like no other being on the Planet. Especially his Ultimate Dream of BEATING Intel is now sitting right in his lab. These geniuses could care less about how much money they make. They live by the smell of blood in their enemy's defeat. Jim is a Jedi Knight in every sense of the word. Who has been held down out of the loop for far too long and most likely, that's the only reason Apple canned the PWRficient Project when they bought PA Semi.

        Not just to use Jim and the other talent that had already fled PA. But as a favor to their new buddies at Intel. Remember how Apple used to diss Intel. That just shows you how TWO FACED they are. And the recent Lawsuit against Samsung proves it in SPADES!

        Guess who's getting all the Business that TSMC has been losing? Yeah.... SAMSUNG!

        They are now making Nvidia's Tegra 3 and 4 chips as well as Qualcomm S4, etc coming off line the new 28nm lines in Austin Texas. Samsung is investing almost as much in CAPEX spending as Intel this year and they will be spending more than Intel next year. That makes them a 3Peat #1 Top CiCi Award Winner with $3.6 Billion last year, $4 Billion this year and spending another $4 next year.

        Now let me put that in perspective for you. That Apple vs Samsung lawsuit was nothing more than a Grudge Match for Samsung, for out selling them in Smartphones (2 to 1 last quarter alone). Globally Samsung sold half the Android phones last quarter. Which out sold Apple iOS smartphones 4 to 1 last Quarter. To ensure that Ubiquitous 70% Market Share keeps right on growing AD INFINITUM!

        So exactly what does this all mean? Well it doesn't a Genius like Jedi Knight Jim Keller to understand that after this present contract expires with Apple, Samsung already has a steady flow of customers lined up to make their chips for them. What does that mean for Apple? Well they can kiss those all those Import Duty Benefits that aided them in attaining record Profits GOODBYE! lol.... it's all on the count SAMSUNG giving NEW Jobs to Americans that Apple can't offer, because it would kill the only thing that's putting them in Stratosphere of Profits, that's the only reason they're the Darlings of Wall Street NOW!


        btw... Apple why did 'ya have to go and ruin a good thing with Samsung and their Trade Zone Benefits? lol.... and finally.... why in the freaking world would Intel make ARM chips to compete against themselves? SAMSUNG can do that, because aren't out snake greater profits off ridiculously over priced products. They also have one thing on their side Intel doesn't have. Some good old fashioned TRUTH in What They Preach.

        And here it is in a NutShell; Intel sold Us and TSMC a bill of goods filled with Hyperbole (like Android can't use MPC lol.... It's Linux STUPID) about their wonderfully flawed GATE LAST HKMG Process giving superior YIELDS over IBM and it's (Jedi Knight "Common Platform Alliance" 28/32nm Gate First HKMG. Which is proving at this very moment to be capable being far more versatile, with higher Yields than Intel's HOCUS POCUS process... back here in the Good Ol' USA in SAMSUNG's Austin Texas Semiconductor plant! ^_*
  • Intel

    Jeff interesting that you say that. Intel may just be ahead of the game:

    Paul Dawson
  • I'm sure they'd just sue

    Apple would never be willing to navigate this patent mess for chip development. They'd get pounced on from 50 angles from people who would claim patent injury if Apple joined the market.

    This will never happen. I only wish it would, so we'd see a good catfight with Apple on the nasty, receiving end of this jacked up patent system.
    Agnt Duke
    • Don't be too sure Apple will lose

      Apple is going to sue others for making rectangular chips with rounded corners.
      • Rounded...

        You can get chips with rounded corners now. Who knew?
      • Let's hope they sue you

        For plagiarizing Jobs image.
        Cylon Centurion
        • Jobs image

          so you agree Jobs had horns, right?
          • Absolutely

            How else does he butt heads with todd's buttocks...

            Cylon Centurion
  • Apple wants to own -- and now owns -- chip designs, and Intel does not want

    ... to do low margin business -- which is being contracted manufacturer for Apple. Intel earns their crazy billions of profits by selling their own designs.

    This is the reason why Apple could not make Intel producing chips for them. The best 22 nm technology has limited capacity and Intel certainly uses it only for making chips of their own design, not any third-party clients.

    And worse 32 nm processes at Intel are not any cheaper than Samsung's or TSCM's. So no point either.
  • Samsung's definitely in the cards

    Part of the switch-over of the Austin plant from memory to SOCs is based on Apple's business. One has to imagine that they have a contract for some minimum output here. Though, given Apple's volumes and the fact they own their current SOC design (A5, A5x, and presumably, whatever's in the iPhone 5), it's perfectly reasonable for them to get a second source.

    Of course, Samsung also provides DRAM and Flash. That could even be a special linked price -- buy all three, or pay more for the others. Though at Apple volumes, who knows. And these are commodity parts, mostly (the Apple SOCs have a rather specialized stacked interface for memory, but the memory itself may well be bog standard).