The announcement on Feb. 25 that Intel Corporation (NASDAQ:INTC) had inked a foundry deal with another chip maker, Altera Corporation (NASDAQ:ALTR), ignited furious speculation that Apple Inc. (NASDAQ:AAPL) might employ Intel in this role. Reuters even reported on March 7 that the matter had been discussed in a meeting between Apple and Intel, according to an unnamed source, although no agreement had been reached. Is there any possibility that such an agreement could come to pass?
From Apple’s standpoint, it’s a fine idea. Having access to Intel Corporation (NASDAQ:INTC)’s most advanced production process, designated 22 nm (based on characteristic feature size), would provide Apple Inc. (NASDAQ:AAPL) a leg up on competitors, especially Android competitors such as Samsung, who use a 32 nm process. In chip fabrication, smaller is generally better, from a fabrication cost standpoint as well as energy efficiency of the product chips.
A foundry relationship with Intel Corporation (NASDAQ:INTC) would also allow Apple to sever its foundry relationship with Samsung. Despite the suits and counter suits, Samsung has continued to fab the processors for the latest Apple devices, the iPhone 5 and the fourth-gen iPad.
Intel would gain as well through greater utilization of its semiconductor fab capacity, which has been underutilized as Intel Corporation (NASDAQ:INTC) processor sales have stalled. The fact that Intel CEO Paul Otellini is about to retire has further fueled speculation that his replacement might embrace the foundry role, or at least have a major decision to make about it.
Intel Corporation (NASDAQ:INTC) could do with the revenue boost that the extra foundry work might bring in. In 2012 net revenue was $53.3 billion, down slightly from 2011 at $54.0 billion. Counterbalancing the appeal of added revenue is the fact that gross margins would certainly be lower in the foundry business. Intel maintains an admirable gross margin of 62.1%, whereas foundry work would probably be in the low 50s. But becoming a foundry for ARM processors is a scenario fraught with deeper implications.
Contradicting the plan
The problem I have with the ARM foundry scenario is that it contradicts Intel’s strategic plan for this year, as outlined in their 2012 10-K filed Feb. 19. Intel’s foundry work doesn’t even get mentioned. Is this because Intel Corporation (NASDAQ:INTC) is being super secretive? I doubt it. Unlike many other companies, including Apple, it’s not particularly hard to figure out where Intel is going. Their transparency is a necessary consequence of leading (or perhaps co-leading with Microsoft Corporation (NASDAQ:MSFT)) an entire industry. Too many companies depend on Intel, and depend on knowing Intel’s future direction. So Intel publishes processor road maps that stretch years into the future and holds regular Intel Developer Forums to fill the PC industry in on the details.
Intel Corporation (NASDAQ:INTC)’s plan as outlined in the 10-K is basically what I described in Can Intel do to ARM what it did to PowerPC? so I won’t belabor the details. Suffice it to say that Intel plans to move the x86 architecture processors, the Core and Atom series onto tablets and smart phones competitive with ARM in every way: performance, power consumption and form factor. With devices such as the HP Elitepad 900 and the Microsoft Surface Pro, it’s already starting to happen, and the arrival of Fourth Gen (Haswell) Core processors will further Intel’s market penetration with even lighter, thinner tablets that are fully Windows 8 Pro capable.
