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.
Given this plan, it’s unlikely that Intel Corporation (NASDAQ:INTC) would pursue any foundry work that harms the competitiveness of the Intel Architecture (x86) platform or major customers and allies that depend on it, including Microsoft Corporation (NASDAQ:MSFT), HP, Dell, and Lenovo. Intel making ARM processors for anyone, especially Apple Inc. (NASDAQ:AAPL), would certainly do this.
Altera deal no impact on Intel’s core business
The foundry agreement with Altera Corporation (NASDAQ:ALTR) had no impact on Intel Architecture competitiveness. Altera is a small (market cap $11.2 billion) IC maker whose main product is the FPGA (Field Programmable Gate Array), a type of IC in which the silicon device logic is programmable. Although Altera Corporation (NASDAQ:ALTR)a produces other types of chips, including ARM processors, the agreement only covered the production of FPGAs. FPGAs are widely used in communications and processing and are essentially neutral devices in the Mobile Internet Wars being fought by Apple, Google and Microsoft Corporation (NASDAQ:MSFT).
It’s not even clear that the Altera Corporation (NASDAQ:ALTR) deal will help with capacity underutilization, since it involves using Intel Corporation (NASDAQ:INTC)’s most advanced 14 nm process at some time in the future. The 14 nm process hasn’t yet seen use in production of Intel Architecture processors.
Even the threat of an agreement with Apple Inc. (NASDAQ:AAPL) represents a slap in the face of Microsoft, but this would not be beyond the pale for Intel. Intel must be frustrated with Microsoft’s dalliance with ARM in the tablet and phone space, so the leaked report might be Intel’s doing.
Not ready to capitulate
However, agreeing to become an ARM device foundry would amount to a massive capitulation on the eve of Intel’s assault on the ARM mobile device sphere. If Intel’s plans lacked credibility, then I could see them wanting to hedge their bets, but Intel Corporation (NASDAQ:INTC)’s threat to ARM is quite credible. Intel might not succeed, of course, since in war no outcome is certain, but abject surrender at this stage is certainly premature.
How do such rumors take on a life of their own? Reuters started talking up the Apple Inc. (NASDAQ:AAPL) angle on Feb. 25, even before it could report the supposed Intel/Apple meeting. This seems to be a case of “helpful” advice as rumor. Evidently, the folks at Reuters think that an Intel/Apple collaboration would be a good idea, so they report it as if it were (almost) real. We regularly see the same phenomenon with rumors about an Apple television.
The article Intel’s Foundry Business: Sideline or Strategic Thrust? originally appeared on Fool.com and is written by Mark Hibben.
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