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Reportedly no definitive agreement has been reached, but Apple is keen on moving away from Samsung dependence

The Chicago Tribune reports that Intel Corp. (INTC) has been in talks with Apple, Inc. (AAPL) to establish a foundry relationship.  The possible hookup could also see Intel co-design the company's next generation iPhone and iPad processors, based on a future Atom mobile processor.

I. New CEO, New Partnership With Apple?

Intel is in the process of finding a new CEO since Paul Otellini announced in November that he would be retiring after eight years in the position.  The new Intel CEO is expected to face substantial pressure to step up mobile efforts, as device sales continue to move away from the traditional PC.

Intel's smartphone chips are currently faster than some, but not all ARM processors.  While Intel enjoys approximately a two year edge in semiconductor manufacturing process over the market leaders -- ARM Holdings Plc (LON:ARM) licensees Qualcomm, Inc. (QCOM) and Samsung Electronics Comp., Ltd. (KSC:005930) -- its smartphone chips aren't quite as far ahead, as they're currently on Intel's older 32 nm node.  
Intel clean room employees
Intel is rumored to be in talks to make chips for Apple devices.
[Image Source: Press Photographers Assoc. of Ireland]

The latest Atom smartphone processors are surprisingly decent in power consumption, but fail to beat the best of the ARM crop in speed.  One issue is core-count; Intel only currently makes single-core smartphone chips. Most top ARM smartphone chips are quad-core.  That should soon change as Intel is expected to launch multi-core x86 smartphone processors early next year.

Apple declined to comment on the report of smartphone processor talks.  An Intel spokesman Chuck Mulloy commented that Intel is in constant talks with Apple, who is a top buyer of its PC processors, but refused to comment on the specific rumor of an iPhone/iPad tie-up.

II. Potential Deal Would Likely Begin Solely as a Contract Fab Business

A partnership with Apple could begin with a mere foundry relationship, according to the report's sources.  Many of Intel's older foundries are still as advanced or more advanced than foundries of rival chipmakers like Samsung.  And many operate at less than full capacity, raising the possibility of production for a third party.

Such a deal -- making Apple ARM processors on older Intel fabs -- might be attractive to Apple as it would reduce dependence on arch-rival Samsung Electronics, who currently manufactures most of Apple's smartphone and tablet processors.

Pat Becker Jr., of Becker Capital Management, whose firm owned $39M USD worth of shares of Intel stock last year, is quoted as commenting, "If you can have a strategic relationship where you're making chips for one of the largest mobile players, you should definitely consider that. And for Apple, that gets them a big advantage."

Apple A5
The Brains of the iPhone are currently made by arch-rival Samsung at its new Austin, Texas factory. [Image Source: iFixIt]

Analysts and shareholders have been pushing Intel, not only to get more aggressive on mobile, but get into the contract foundry business as well.  They argue contracts to make third-parties' chips can help Intel absorb the high cost of deploying new process technologies and weather the periodic downward swings of the device/PC market.

JMP analyst Alex Gauna comments, "This is potentially huge.  The new CEO will have a very large opportunity to take this to the next level. Those discussions about taking on Apple as a foundry customer are going to be very complex and very contentious."

Macquarie analyst Shawn Webster estimates that Intel could make $4.2B USD extra in revenue a year by 2015, with a 50 percent gross margin, if it switches its idle capacity to producing iPhone and iPad chips.

III. Contract Manufacturing -- More Stability, But Lower Margins

But there are concerns.  The 50 percent figure quoted by Mr. Webster is significantly lower than Intel's total overall margin of 60 percent.  It's more typical of less profitable fab giants like Taiwan Semiconductor Manufacturing Comp., Ltd. (TPE:2330) (TSMC), whose margin last year was 48 percent.

But slowing sales have forced Intel to already sign a number of contracts with smaller third-party terms to pick up a bit of the idle capacity.

And Intel just signed up for its first contract fabrication with a larger firm -- Altera Corp. (ALTR), a top player in the field of programmable logic devices (including FPGAs) which are commonly used in automotive and other embedded applications.

Altera FPGA
Altera will make its FPGAs at Intel Fabs.  [Image Source: Wikimedia Commons]

Financial terms of the deal were not publicly disclosed.  Intel is expected to start making Altera's FPGAs on its upcoming 14 nm node, which will land in 2014.

Sources: The Chicago Tribune, Intel

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RE: Intel better get smart
By retrospooty on 3/7/2013 3:28:07 PM , Rating: 2
Not really... Intel had their own ARM processors back 6-7 years ago. It was the Intel StrongARM cpu. It was used on later Palm devives and others as well. They actually sold the whole business unit off to Marvel because they thought Atom would take over. LOL

RE: Intel better get smart
By Mitch101 on 3/7/2013 3:53:39 PM , Rating: 5
Atom is not bad and die shrinks will make it better.

What Im surprised about is the lack of talk of AMD Jaguar

RE: Intel better get smart
By GotThumbs on 3/7/2013 4:13:25 PM , Rating: 3

I'm a big fan of AMD's APU's and every system I've built over the years has been AMD Powered.

I think AMD was smart in getting out of the "Fastest" competition with Intel and re-focused on building lower-powered All-in-one chips.

I look forward to one day owning a AMD powered Phablet.

Best wishes,

RE: Intel better get smart
By someguy123 on 3/7/2013 7:10:51 PM , Rating: 2
AMD definitely has great units for lowpower/budget builds, but I don't think it was a good decision to completely dump their highend where the real margins are. ARM posts good profits thanks to having very little cost by just licensing out designs. I can see AMD and intel squeezing money out of this market but I don't see it being too lucrative while still being able to compete with ARM.

RE: Intel better get smart
By mi1400 on 3/7/13, Rating: -1
RE: Intel better get smart
By TakinYourPoints on 3/8/13, Rating: -1
RE: Intel better get smart
By TakinYourPoints on 3/12/2013 5:15:43 AM , Rating: 1
Holy crap, I knew that there were a lot of AMD fanboys around here but y'all are MAD, haha.

Fact: AMD CPUs are not competitive in mid/high end performance, end of story, they haven't been for years. It is the main reason Intel can get away with milking parts for so long, AMD has done an awful job keeping up.

If AMD was price/performance then I'd go back to where I was before 2006, AMD...

RE: Intel better get smart
By retrospooty on 3/7/2013 5:32:09 PM , Rating: 2
Yup... intel has potential. If they put focus on it, they can pull it out. they are usually a node ahead of everyone. They have been on 22nm for a year now. They hit 22 before everyone else hit 28. If they get haswell style power tweaks into next years 14nm atom becomes a major hit.

RE: Intel better get smart
By ilt24 on 3/8/2013 10:19:16 AM , Rating: 2
I think AMD is making the same mistake Intel made with tablets. They are concentrating on pairing the processors with windows which is currently a very small part of the tablet market. I’m don’t think AMD is currently doing anything to enable OEM’s to produce and AMD based Android tablet…or even better yet a dual boot tablet.

RE: Intel better get smart
By Ammohunt on 3/8/2013 10:55:40 AM , Rating: 2
There is not a single reason to use x86 in mobile devices since the arm platform is so prevalent its actually would be a step backward for app writers to have to port the thousands of apps to x86 its just not going to happen. Intel missed the boat.

RE: Intel better get smart
By fic2 on 3/8/2013 12:18:17 PM , Rating: 2
The thousands of apps aren't compiled for a specific processor architecture . They use compiled byte codes that run in a virtual machine. Classified as "write once, run anywhere" type languages.

RE: Intel better get smart
By blue_urban_sky on 3/8/2013 2:19:11 PM , Rating: 2
This is what confuses me, you think the 'apps' in mobile devices are progression?

I would prefer a tablet that ran Photoshop and maybe angry birds rather than have angry birds and maybe Photoshop lite.

I hope that industry will move toward a singular OS at some point and this means either having Android on a desktop or windows on a tablet.

This may change with cloud services but I still feel dealing with a large file in the cloud is impractical for many.

RE: Intel better get smart
By ilt24 on 3/8/2013 10:09:27 AM , Rating: 2
Yes they ended up with StrongARM…which became XScale…after buying DEC’s semiconductor division minus Alpha and then decided to sell it to Marvell. I’m not sure Marvell is exactly raking in the dollars with that line of processors.

Sure if you want to roll forward to today, and look at the volume, you can say Intel should have stuck with it and thrown more R&D into ARM based processors. I’m sure the prospect of being one of many players in with ARM didn’t sit well with them and at the time. I also think Intel looked at the ~$20 asp of these products vs. the ASPs they were getting at the time for PC processors and didn’t think it was worth it.

The original Atom (2008) was aimed at netbooks and other non-phone devices. In 2009 after the iPhone was a hit and Android was starting to take off that they saw the light and started to develop an x86 processor specifically for a phone. Now they (finally) have processor for phones; while it’s not the cream of the crop, it’s a decent initial offering and it will be very interesting to see how both the 22nn version due at the end of this year and the 14nm version due at the end of 2014 stand up to the ARM offering.

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