Intel (NASDAQ:INTC) investors have repeatedly heard over the past two years that "Intel missed the mobile business," or that "Intel doesn't have a mobile strategy."
Intel is the world's largest semiconductor manufacturer, routinely producing its products with, by far, the most advanced manufacturing process technology and processor architecture technology. It would be reasonable for investors to expect that a company with the resources of Intel would have something better than a primitive mobile strategy. Let's take a look at the progress to date.
Early this year, Intel announced several non-U.S. partners in the mobile business. One of these is Lenovo, which is in the process of passing Hewlett-Packard (NYSE:HPQ) as the world's largest PC manufacturer. As such, we can assume that Lenovo and Intel have "met." Lenovo has also entered the smartphone business with some impressive results:
In last year's third quarter, the company had a 1.7% share of the market, according to Gartner.
A year later, the company was ranked second in China's smartphone market for the third quarter, with a 14.8% share. This put it right behind Samsung, which had a 16.7% share.
'We know that Lenovo is one of the strongest local companies in China,' said Gartner analyst Sandy Shen on Wednesday. 'But we just didn't expect the change to come so fast... We thought it would take them several years to grow their business in mobile devices.'
Lenovo grew 870% in smartphones in a single year and shipped 7 million smartphones in the third quarter. Intel has also entered into agreements with Google (NASDAQ:GOOG) to make Android and x86 more compatible. Intel has entered into a comprehensive agreement with Google's Motorola Mobility business unit. The results of that agreement are just now being recognized. Motorola has introduced the Intel-powered Razr i in Europe as a complement to the nearly identical non-Intel Razr M in the U.S.
Motorola is also releasing an Intel-powered smartphone in China through China Mobile (NYSE:CHL), the world's largest mobile service provider with over 700 million subscribers. Yes, that number is twice the entire population of the U.S. This phone carries the Intel Z2460 and an Intel baseband chip.
None of these smartphones are market leaders or iPhone killers. They are mid-market, inexpensive, capable smartphones. All of these products use the Z2460 Medfield SoC. This device is a four-year-old architecture manufactured on Intel's trailing edge (but cheap) 32nm process. Next year will see 22nm, new architecture dual core SoC with 4G LTE on a chip, or nearby, with much higher performance and much lower power.
We have no idea how well these products are selling in their respective markets, and Intel will remain silent on that subject because that is what "dark horses" do. Since there is a dire shortage of 28nm devices from Taiwan Semiconductor (TSMC), what is available is going into high-end phones, primarily in the U.S. Because of the above situation, we could get a pleasant surprise regarding the international progress of Intel's mobile effort.
The Intel 32nm devices are built on fully depreciated production lines. Depreciation on state-of-the-art fabs could run as high as $2,000 per wafer. I would expect the Z2460 has a manufacturing cost of less than $4 and a selling price of $8-$10. That would be tough for competitors to match, especially in a 28nm shortage environment.
Obviously, the Intel strategy does not include the U.S. at this time due to the lack of a 4G LTE solution. That problem is expected to go away by the end of the year. The strategy cannot include Samsung or Apple since devices for both companies are produced by Samsung. What's left is Google and Motorola. Low-cost international phone makers in immense markets are being addressed by Intel in a very capable way.
Early next year we should see some truly market-leading smartphone products from Motorola (Google) utilizing the dual core Z2580 SoC. The 2012 strategy has been to begin penetration of the world beyond the U.S., and Intel seems to be knocking on the right doors. The 2013 strategy will include the U.S. Someday, the Apple fab business will come Intel's way as well.
In the end, Intel will have a near monopoly in mobile just as it does in PCs and servers. The company doesn't know any other way. As Paul Otellini transitions into retirement, I would say, "Job well done."
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.