October 5, 2017 10:00 am JST

Apple moves to become big player in semiconductor design

US company's chip ambitions risk disrupting supply chain

CHENG TING-FANG, Nikkei staff writer

Apple has been boosting its processor capabilities through numerous acquisitions over the past few years. © Reuters

TAIPEI Apple is expanding its development of proprietary semiconductors to better compete in artificial intelligence and reduce its reliance on major suppliers such as Intel and Qualcomm, according to industry sources in Asia.

The U.S. tech titan has long been known for its prowess in chip design, building core processors for iPhones and iPads. It has also created fingerprint chips, and designed a unique chip for AirPods that allows seamless pairing with other Apple hardware.

Most recently, it unveiled an AI chip powering facial recognition for iPhone X in mid-September -- a foretaste of the coming battle over next generation applications in the area of AI.

Another sign of Apple's intentions came with its decision to join the consortium led by U.S. private equity firm Bain Capital that is paying 2 trillion yen ($17.7 billion) for the memory chip unit of embattled Japanese conglomerate Toshiba.

The Cupertino, California-based company ranked as the world's No. 4 chip design house by revenue at the end of 2016, trailing only Qualcomm, Broadcom, and Taiwan's MediaTek, according to research company IC Insights.

Chips are the essential components for powering computing functions inside electronics. They appear inside a wide range of gadgets, including notebooks, smartphones and connected devices.

"By designing its own chips, Apple can better differentiate itself from others. Further, depending too much on other chip suppliers in the age of artificial intelligence will deter its development," said Mark Li, a Hong Kong-based analyst with Sanford C. Bernstein.

DOUBLING DOWN Industry sources and analysts suggest that Apple is keen to expand its semiconductor capabilities further. They say the company is interested in building core processors for notebooks, modem chips for iPhones, and a chip that integrates touch, fingerprint and display driver functions.

"We believe that more system houses will design their own chips. The purposes are to develop and protect their proprietary technology information, to make more efficient chips for their unique needs, to lower [costs] and to do inventory control better and keep all logistic operations confidential," Samuel Wang, a U.S.-based analyst at research company Gartner, said.

Bernstein's Li said that Apple has invested in research and development for baseband modem chips responsible for mobile communication. Currently, it purchases these from Qualcomm and Intel.

"It would not be surprising that Apple develops its own [modem chip]," he said.

Two other chip industry executives echoed Li's view that Apple will develop its own modem chips or at least boost its related capabilities -- a view bolstered by Apple's poaching top Qualcomm modem chip engineer Esin Terzioglu earlier this year.

But Li added it was unlikely that Apple could roll out such components within two years. Modem chips have a very high development threshold and need to fulfill requirements of different operators worldwide.

A veteran chip industry executive estimates that it would require more than a minimum of 1,000 engineers to work on such a project.

Core processor chips for the MacBook range is another area Apple is trying to venture into. Two industry sources say that Apple is trying to cut its dependence on Intel when it comes to notebook chips and instead build them using ARM architecture, referring to the SoftBank-controlled British chip designer.

"Notebooks are becoming thinner, while consumers are demanding better mobility and longer battery life. That gives ARM's architecture, which is known for its power efficiency, a very good opportunity," a chip industry executive said.

Intel's x86 architecture chips have dominated the PC and notebook market for several decades as they are strong for computing, while ARM controls 95% of market share for mobile devices.

Apple also aims to design its own chips that could integrate touch, fingerprint and display driver functions, sources say.

"Apple has hired engineers from Taiwan's No. 1 display driver chip designer Novatek and panel maker AU Optronics as it wants to control next-generation display technology and some related key components," said a Taiwanese chip industry manager.

Analog Devices and Synaptics are Apple's key suppliers of touch sensors and display driver ICs.

SUPPLIERS RATTLED Over the past few years, Apple has boosted its silicon capabilities through a string of acquisitions: 3D motion-tracking chip company PrimeSense, low-power wireless chip company Passif Semiconductor, fingerprint chip company AuthenTec, and NAND flash-controller maker Anobit.

Apple has also been aggressively grabbing AI chip-related startups: facial recognition specialist RealFace, machine learning platform Turi, augmented reality companies Flyby Media and Metaio, and some teams such as Emotient, Perceptio and VocalIQ that can enhance emotion, photo and voice recognition.

The world's largest company by market cap further bolstered its chip ambitions by recruiting talent from Broadcom, Texas Instruments and others to grow its team. It also hired former Imagination Technologies' chief operation officer late last year before announcing it would build its own graphics processing chips.

Apple is currently advertising 200 chip-related positions on its website.

The U.S. tech giant's efforts to turn itself into a chip powerhouse have unsettled some suppliers.

Qualcomm's earnings have taken a hit due to ongoing legal warfare between Apple and Qualcomm, beginning in January, over the latter's licensing fee model for the modem chip.

Apple has asked its assemblers not to pay royalties to Qualcomm. It has further turned to Intel to supply some modem chips after its five-year contract with Qualcomm expired last year.

Qualcomm has relied on Apple and Samsung Electronics for 40% of its revenue, which was $23.5 billion for the past fiscal year. The U.S. chipmaker's revenue and net profit dropped year-over-year in the past two quarters. Its shares have lost some 21% since the beginning of the year.

GOOD FOR PRODUCERS Still, not all of Apple's chip suppliers are facing a potentially grim future.

Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, is the most obvious winner. It dominates Apple's chip production including core processors for this year's 10th anniversary iPhone range.

Apple has been TSMC's largest client since 2015 and it accounted for 17% of the Taiwanese chip titan's revenue in 2016. The contribution will exceed 20% for all of 2017, according to Bernstein's projection.

According to an industry source, Apple has already begun to engage TSMC to develop and test core processor chips for the iPhone range coming out in 2018.

Meanwhile, TSMC said on Sept. 29 that it will build a production facility for cutting edge 3-nanometer chips in southern Taiwan, reaffirming an announcement made by a senior Taiwanese official late last year.

Apple did not respond to an email seeking comment.

Nikkei staff writer Debby Wu in Taipei contributed to this report.

Asia300

MediaTek, Inc.

Taiwan

Market(Ticker): TAI(2454)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 15,331.72M
Shares: 1,581.45M
Asia300

AU Optronics Corp.

Taiwan

Market(Ticker): TAI(2409)
Sector:
Industry:
Electronic Technology
Electronic Equipment/Instruments
Market cap(USD): 4,039.96M
Shares: 9,624.24M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 342,720.87M
Shares: 147.34M
Asia300

Taiwan Semiconductor Manufacturing Co., Ltd.

Taiwan

Market(Ticker): TAI(2330)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 196,098.70M
Shares: 25,930.38M
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