As the popularity of the iPhone and other Apple hardware accelerates, Apple needs suppliers that can keep up with its strict demands for timelines, efficiency, product deployment, and innovation. Apple is moving away from Qualcomm, and developing a stronger partnership with Intel.
Apple and Qualcomm
The strained relationship between Apple and its long-time iPhone modem supplier, Qualcomm, escalated into a legal dispute in October 2017, with Apple refusing to pay ongoing royalties to Qualcomm (worth over US$1 billion) and Apple advising its other suppliers and assemblers to follow by not paying their royalties to Qualcomm either. Qualcomm replied by lodging a ban on the import and export of iPhones in the USA and China, potentially crippling Apple's sales expectations.
The heart of this dispute is Qualcomm's royalty scheme, which charges a fee based on the final cost of an entire iPhone, rather than a payment on the part or technology that is owned by Qualcomm. Apple asserts that this results in Qualcomm earning higher fees on the cost of parts that it doesn't own, which Apple claims is unfair. Qualcomm asserts that its technology is "at the heart of every iPhone" and therefore is legitimate.
Apple and Intel
While that dispute continues in the courts, Apple is strengthening its ties with Intel. Intel supplies chips for the iMac and other products, and has been progressively moving in to selling chips to mobile phone manufacturers and telecommunications companies to offset its declining sales in other areas.
As Intel movies into cellular communications products, Apple has an opportunity to align itself with Intel as a major supplier and fabricator/manufacturer of chips and modems. Working closely with Intel, Apple gains a new partner, has strong control over the product, and Intel gains a valuable customer who purchases large volumes of product. It's a win-win.
Potentially, Apple could completely replace Qualcomm chips in iPhones with Apple-Intel co-developed chips, and dump Qualcomm as a supplier.
Broadcom and Qualcomm
Meanwhile, the patent and royalty dispute between Apple and Qualcomm has seen Qualcomm's earning slide, and its share price tumble. Competitor Broadcom has seized on this opportunity to make a low-priced offer to buy Qualcomm for as much as $130 billion, a fraction of its previous market capitalisation.
Apple's Supply Chain
Apple has been trying to diversify its supplier network, both to keep up with demand, and to give it options if one supplier decides to increase prices or assert some other limitation. That's partly why Apple has been investing heavily alongside LG, to source screens from LG, removing its sole reliance on Samsung as the major supplier of LCD screens for the iPhone 7, 8, 8 Pus, and for OLED screens for the iPhone X.
Apple has many suppliers for various parts of its products. All of those suppliers manufacture a set roster of parts, which are then shipped to assemblers, who assemble the parts into the final product. Apple relies heavily on Foxconn for its ability to service Apple's demands. Foxconn recently announced it will spend $10 billion to set up factories in the United States in an effort to support Apple. Of course, Foxconn has other customers who may also benefit from localised support.
Back to Intel
Apple uses Intel chips in the iMac, Mac Pro, Macbook, Macbook Pro, and more recently in the iPhone.
The popularity of Apple's computers soared when they first introduced Macs with Intel inside more than five years ago. Intel's chips, along with Apple's design and marketing, catapulted the iMac into the mainstream, and gave Windows customers another reason to spend their money with Apple. The ability for the Intel-based Macs to use Boot Camp to run Windows alongside macOS gave those pro-sumers who were sitting on the fence, the ideal opportunity to pick and choose between Apple and Microsoft software. It also enabled Microsoft software such as Office to be easily installed on a Mac running macOS or WIndows.
Now, with Intel in the smartphone chip arena, with Apple as a co-designer of the chips, Apple has a strong supplier to outfox Qualcomm, and Intel gets a new customer with deep pockets.
Of course, Intel knows that supplying Apple is a tricky business, and a profitable one. If Intel can keep up with Apple's rapid innovation and continue to deliver the goods, the money will flow.
Apple to rely on Intel
As Apple seeks to integrate more components into a smaller space, for iPhone, iPads, and iMacs, the benefits of system-on-chip designs become more appealing. Saving space, time, battery power, and increasing manufacturing capabilities, Intel has the opportunity to build the processors that Apple designs alongside Intel's own engineers.
The inside of the iPhone X shows a unique double-stacked motherboard, surrounded by the battery and other components. As more and more components migrate into an integrated design or become part of a system-on-chip, manufacturing efficiency increases.
Apple doesn't compete with Intel in other areas, so they are close to being a perfect partner. Apple does compete in the smartphone space and the tablet space with its supplier Samsung, something Apple is trying to avoid.
In the future, Apple could even move the manufacture of its future chips (such as the A12 and A12X) away from TSMC in Taiwan, across to Intel.
Moreover, Intel is happy to be Apple's best friend, and accept Apple's money.
Until next time,
Xavier Zymantas
XYZtech
XYZ Media Group