Apple, Samsung, and Intel

Apple and Samsung have the most interesting relationship of any two companies in the technology industry today, and perhaps the most interesting of any two companies in any industry in recent times. On one hand, they‘re suing the pants off of each other in courts across the world. On the other, Samsung supplies Apple with the component at the heart of the iPhone and the iPad, the processor. This we think you ripped us off and you owe us tons of money but please keep making our processors for us relationship is fundamentally unsustainable. Something is going to happen, and it won’t end well.

I believe it’s in Apple’s best interest to move away from Samsung as the sole supplier of its A-series chips. Adding another supplier (or two) would be better than the current set-up, of course, but Apple should move away from Samsung entirely, and as soon as possible.

Who, then, should manufacture Apple’s A-series ARM-based chips? What other companies even have the capacity to produce the 200+ million processors Apple demands every year, not to mention the millions and millions more per year the company will demand in the future, as it continues to grow? Here is a short but incomplete list of companies that have years of experience producing other companies’ ARM-based system on a chip (SoC) designs: TSMC, UMC, Global Foundries, SMIC, and Tower Semiconductor.

I imagine that few, if any, of those companies could produce enough chips to satisfy Apple’s demand. But there is one company with the ability to meet Apple’s demand, a company with decades of semiconductor fabrication experience, a company that recently started to produce the designs of other companies’ ARM-based SoCs: Intel.

Though most people don’t know it, Intel in 2012 agreed to start manufacturing the ARM-based SoCs of other companies. The company realized its business model was outdated, and, to the credit of then-CEO Paul Otellini, started taking steps to disrupt itself. The company recognized that if it maintained its current business model of selling fully fleshed out x64 chips to OEMs like Dell and HP, it wouldn’t last in the Post-PC era, and that if the company wanted to remain relevant in the personal computer market going forward — and why wouldn’t it? — then it needed to change.

Apple, due to the sheer volume of processors it purchases, will always be at the mercy of its suppliers. But if Apple were to contract the manufacturing of its A-series chips to Intel, no longer would the company be at the mercy of Samsung, a supplier who stands to gain a lot if the iPhone were to suffer from a component shortage. Rather, it would be at the mercy of Intel, a company that has nothing to gain and everything to lose by not producing enough SoCs. That’s a much healthier dynamic for a client-vendor relationship.

Historically, Intel has been a great partner to Apple. It has produced custom chips for the company and has given it short-term exclusives on new processors. Additionally, if Intel didn’t do such an incredible job during the PowerPC-to-Intel transition of 2006, Apple wouldn’t be anywhere near as successful as it is today. The fact that Apple was able to say You can run Windows on your Mac definitely helped convince tons of on-the-fence customers to get one. If it weren’t for Intel, Apple wouldn’t have been able to say that, so tons of Macs never would have been sold, and Apple’s halo effect would not have been as strong as it was, resulting in fewer iPhone and iPad sales. On the flip side, Intel’s worst offense was not finishing the development of its new x64 chips in time for Apple to release new Macs when it had planned to. If Intel were to produce Apple’s SoCs, though, that wouldn’t even be an issue — Apple would be the company designing the chips, Intel simply manufacturing them.

Contrast that with Apple’s relationship with Samsung. Samsung, as a South Korean company, has a lower bar for what’s considered ethical (as measured by Western standards) than its American counterparts. The company has admitted, in court, to ripping off Apple’s intellectual property, and I have no doubt that Tim Cook has considered the possibility that Samsung reverse engineers the processors it produces for Apple before Apple releases them to the public in order to make its own smartphone and tablet offerings more competitive.

It’s obviously in Apple’s best interest to hire Intel to produce its A-series chips instead of Samsung. But is it in Intel’s best interest as well? That’s the question. Unless it’s in both companies’ best interests, a deal won’t be struck.

Intel has already recognized that it is in the company’s long-term best interest to get into the ARM game in one capacity or another. At the same time, Intel no doubt has also recognized that it is not in the company’s short-term best interest to start producing large quantities of ARM-based chips for any company that asks. Intel has only so much production capacity, and the opportunity cost is too high to start producing low-margin ARM-based chips at the expense of its more profitable x64 processors. The company is at a crossroads: its short- and long-term best interests don’t align, and it has to choose one at the expense of the other.

That’s where Apple’s cash hoard comes in.

With its $125+ billion in cash, Apple could build a factory for Intel, changing the company’s calculus. Rather than Intel having to choose between building ARM-based SoCs or x64 chips, it could make both; Intel could manufacture Apple’s A-series processors without giving up any of its capacity to produce its more profitable x64 designs.

This arrangement would benefit both companies in a number of ways. Apple would no longer depend upon Samsung, its biggest competitor, to produce the chips at the heart of its most successful products. (This is analogous to America asking China to build its most advanced missiles and hoping the country won’t use any of the top-secret technology it learns about for its own benefit when it’s clearly in China’s best interest to do so.) And because Intel has manufacturing capabilities that other companies don’t, Apple might well be able to create better chips than it would be able to if it were to continue using Samsung as its chip manufacturer. Finally, the company would have peace of mind knowing that its chip producer doesn’t stand to gain anything from a processor shortfall, as Samsung does. Even if the factory were to cost $5 billion — and it wouldn’t — it’d be worth it. Steve Jobs said Apple’s cash hoard is for “big, bold” “strategic opportunities”. This move exemplifies that thinking.

Intel would benefit from this arrangement as well. The partnership I outlined above — or something similar to it — would allow the company to further disrupt itself without taking a large financial hit. The company could make Apple’s ARM-based SoCs without having to decrease the production of its more profitable x64 chips. Additionally, Intel needs to get into the ARM game in meaningful quantities if it wants to stay relevant in the personal computing market, and from a business-to-business perspective, there is no better way to do that than take on Apple as a client. Intel could tell all of its potential customers We make Apple’s chips, and we can make yours, too. Every other company would want Intel to manufacture their SoCs. Producing Apple’s A-series chips would jumpstart Intel’s new foundry business and give the company an easy path to success in the ARM game, ensuring the company’s relevancy in the personal computing market a decade from now.

Intel today faces a dilemma. It’s in the company’s long-term best interest to be able to say, ten years from now, that it’s a large manufacturer of ARM-based chips, yet it’s not currently in the company’s short-term best interest to start producing them on a large scale. The company would have to stop manufacturing its own high margin x64 chips in favor of the low margin ARM-based SoCs of other companies. In other words, Intel today has to choose between its short- and long-term best interests. But Apple, with its cash hoard, can solve that problem. By building Intel a factory, Apple can give the company a way to pursue its long-term best interest without sacrificing its short-term best interest.

Both companies have so much to gain and practically nothing to lose from a partnership — so much upside, almost zero possible downside. I don’t know exactly when, but I’m convinced it’s going to happen sometime soon.