TAIPEI -- Intel's shock decision to exit the 5G smartphone modem business marks another setback for the world's biggest microprocessor maker, which once dreamed of taking a leading role in the next-generation communication technology.
Intel's announcement came shortly after news that rival Qualcomm had reached a settlement in its year long, bitter legal fight with Apple over royalty payments. As a result Qualcomm's chips will be used in Apple's future 5G iPhone, marking an end to Intel's ambitions in the smartphone market.
A market leader in central processing units for PCs and servers, Intel came late to the market for mobile communication chips, which includes modems and processors for smartphones. The technological hurdles, as well as the challenge of making chips for customers rather than its own use, proved too daunting for the company.
Admitting failure is likely to have been a humbling experience for a company once on the cutting edge of the chip industry. Founded in 1968 by Gordon E. Moore -- famous as the creator of Moore's law of semiconductor evolution -- Intel created the first-ever commercial microprocessor chip and became a household name as a leader in the PC industry.
Intel's foray into the smartphone age came in 2011 when it acquired Infineon's mobile chip making unit. But the U.S. company has failed to catch up with Qualcomm and MediaTek in mobile chips, and announced its withdrawal from the mobile processor business in 2016 to focus on modem technology development. Modems are crucial components that determine phone quality and data transfer speed.
Intel secured its first order to supply modems for Apple's iPhones in 2016, and had hoped the arrangement would help brush up its own technology. It gained market share in 2017 and become the sole iPhone modem supplier in 2018 due to the legal dispute initiated by Apple in January 2017.
Apple saw working with Intel as a way to reduce its heavy reliance on Qualcomm. The iPhone maker is Intel's biggest client for modem products.
But Intel has long trailed Qualcomm in mobile-related chip design, which prioritizes power-efficient operation. Intel's strength is in making powerful computing chips and the company could not meet the power-management requirements that the mobile era demands.
Qualcomm accused Apple of lowering its product standards to accommodate Intel when the two companies split orders in 2016 and 2017.
Meanwhile, Intel's ambitions required a cultural shift that its employees found difficult. They were not used to dealing with outside customers, sources familiar with the matter said. For 50 years, the company has mostly designed and produced chips for its own use. That meant allocation of resources to priority projects was clear.
However, iPhone's modem business has had to compete with other Intel projects for manufacturing resources. This was one reason for the massive shortage of central processing unit chips for PCs and laptop computers that has afflicted the company since the second half of 2018, as Nikkei Asian Review first reported last year.
In 2018, Intel brought production of Apple's modem chips in-house for the very first time but faced some technical issues, sources familiar with the matter said.
In 2016 and 2017, the company outsourced production to Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker. By the end of 2018, Intel alerted TSMC that it hoped to outsource its modem chips again. It is currently running test production with the Taiwanese chip manufacturer, sources familiar with the matter said.
"The move to outsource is Intel's attempt to reduce its own production risks and reduce committing too many sources in-house for the modem business," a source with knowledge of the matter said.
Even though Intel's modem business has seen healthy revenue growth since 2016, it has been a money-losing business since the company acquired Infineon's mobile unit in 2011.
When Intel CFO Bob Swan took over as CEO of the U.S. chip giant last year, the company's business strategy changed, say sources close to Intel. The focus is now very much on profitable businesses, they said.
Under Swan, Intel also earlier this year ended its partnership to share 5G modems with Chinese state-backed mobile chipmaker UNISOC, as Nikkei reported in March.
In the October-December period of last year, Intel's modem business generated $1.3 billion in revenue, up more than 44% from a year ago. However, it still accounted for only about 7% of the chipmaker's total revenue.
With Intel out of the smartphone modem business, only Qualcomm, MediaTek, Samsung, Huawei, and China's state-backed UNISOC remain in the game. Samsung and Huawei, moreover, only develop modems for their own products.