3 Reasons Apple Should Buy a Chip Manufacturer
With all the legal actions and its successful attempt to keep Samsung's tablet out of Europe, Apple (AAPL) continues to look for ways to outdistance its competitors. Here's an idea: buy a chip manufacturer.
It sounds nuts at first. After all, the semiconductor industry has spent decades largely splitting into companies that design chips and contract fab plants that do the actual manufacturing. And yet, the combination of the two can be powerful: look at Intel (INTC). Apple's strategic directions, potential competitive weaknesses, and resources could make such a move a smart one.
Strategy
Apple has taken control of its chip design. It's already working on at least a third generation chip, the A6, with contract manufacturer TSMC (TSM) reportedly having started trial production using a 28-nanometer silicon process. Translated, that means state of the art.
At least one equity analyst, Peter Misek at Jefferies & Co., thinks that Apple plans to merge the iOS operating system on the iPhone and iPad with the Mac OS, with everything running on an A6 chip, sometime in 2012. (I've been talking about the likely merging of the two since March 2010. There are many reasons it would make sense.)
Experts in chip design and manufacturing I've spoken with have mentioned that having a close connection between the two areas can make for an overall more effective chip engineering process. Manufacturing techniques have significant impact on the best ways to optimize design, but when you have two separate companies, concerns about intellectual property and trade secrets can keep a full conversation from happening. By owning a manufacturing facility that came with deep experience, Apple could get to market faster, improve its chips, and also ensure processing capacity when it wanted it.
Competitive weaknesses
Apple needs to break away from the semiconductor industry as it currently exists. It has already threatened to dump Intel as a supplier. The chip giant hasn't moved as effectively toward low power chips as Apple wants. There's no room for vendors to hold up overall progress.
There are relatively few manufacturers that can provide the expertise and leading semiconductor technology to satisfy Apple. The company becomes dependent, as a result. If Apple completely drops Intel chips, what guarantee is there that Intel would act as a contract manufacturer?
Apple is already trying to move away from Samsung, a smartphone and tablet competitor that also made the previous A4 and A5 chips. Trusting the single most important component of your main product lines to someone whose competing tablet you just got barred from Europe would seem unwise. The old saying about keeping friends close and enemies closer didn't address giving frenemies the keys to your door.
Because there is heavy demand for chip manufacturing services and a limited number of sources, Apple lacks the supply chain leverage it uses with devastating effectiveness. Usually, the company can cripple competitors by vacuuming up supplies that they would need. For example, Apple is forcing vendors to use fiberglass instead of metal in the cases of ultrabooks, the super-light, super-thin devices that Intel champions as competition for iPads and MacBook Airs.
In the past, limited production lines have kept TSMC from making Apple processors. TSMC also has Nvidia (NVDA) and Qualcomm (QCOM) as long-standing customers. Apple can't just brush them away as things stand.
The danger is still theoretical, but it's possibly enough that Apple has found it necessary to take strategic steps to avoid it. Owning TSMC, or a similar company, would give Apple guaranteed access while potentially making components for competitors more scarce.
Resources
Last but not least, Apple has a boatload of money that it's doing nothing with, other than collecting low amounts of interest. Purchasing a contract chip manufacturer would at least put some of that dough to work. Not only could Apple ensure its supply, but it could continue to take in contract work, underwriting the costs of its own needs.
What else could the company do with the money, assuming that, at this point, if it had been inclined to offer dividends, it would have done so already?
Apple and chip manufacturing. It sounds like a way to lose focus, except that it would actually do just the opposite.
Related:
- Apple's iPad May Depend on Tablet Rival Samsung, Which Apple (Of Course) Is Suing
- Intel To Manufacture for Apple? If so, It's a Bad Industry Omen
- Why Apple Will (Eventually) Dump the Mac
Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.
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