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Apple (NASDAQ:AAPL) is in a fierce battle with Samsung (OTC:SSNLF) for market share in smartphones and tablets. It was recently reported on Forbes.com Samsung now has double the market share of Apple in smartphones with a 30% increase year-over-year for the first quarter of 2013. Samsung's strategy has been to compete in all segments of the smartphone market and has benefited from the higher growth in low-cost smartphones where Apple is not currently competing. The tablet market is seeing equally tough competition from Samsung and the other Android OS (NASDAQ:GOOG) vendors. Apple now has a market share of 46.4% in this market which is still growing at an amazing pace. The overall tablet market grew by over 100% year-over-year with smaller tablets seeing the most growth. Microsoft (NASDAQ:MSFT) is competing well in the tablet market as well taking the number three spot in terms of market share.

Apple needs an edge over Samsung if it is going to recover its dominant position in the mobile markets. Intel (NASDAQ:INTC) is the company that can provide that advantage, a manufacturing advantage. It strikes me as funny that Apple, one of the most vertically integrated companies with extreme control over its supply chain may be able to use Samsung's vertical integration against them. You see, Samsung has already developed manufacturing facilities and is committed to that line of business. Actually they currently produce Apple's A6 chips a situation Apple is very interested in finding a solution for. Samsung has already sunk immense resources into its manufacturing capacity to the tune of at least $10 billion, though I don't have an exact figure, and would not switch gears and find a foundry for its chips. This means the advantage Intel brings to Apple in manufacturing is sustainable for the long term if Intel can keep ahead of Samsung.

Intel is not interested in being the foundry for Apple and has made that abundantly clear. I think that is because the senior management team knows they have leverage over Apple and want to take advantage of their position to earn both the design and manufacturing margin from Apple as a customer. Apple needs to get away from Samsung as its foundry but the next best option in Taiwan Semiconductor Manufacturing Company (NYSE:TSM). Why would Apple settle for a company that is using the 28nm technology when a company with 22nm technology and 3-D Tri-gate Transistors is available in Intel? Intel has a manufacturing lead over both of these companies which will transfer an advantage to Apple in both energy efficiency and performance of the CPU. Again Intel is not interested in being the foundry for Apple so a deal will have to be made to transition to Intel designed chips.

There have been rumors for the past year that Apple and Intel are working together to complete a deal that makes Intel the foundry for Apple. Outgoing CEO Paul Otellini has been adamant on not becoming a foundry for companies that ultimately benefit their competitors. It only makes sense not to give away your moat to build your competitors' chips and Intel's manufacturing leadership is that moat. I believe Mr. Otellini has been able to reject the idea of becoming Apple's foundry because he knew the new Atom processor with the Silvermont microarchitecture was coming out this year and that it would on a performance per watt basis handily beat the competition. Now with its release, Intel and Apple can spend the next year optimizing the chip for the iOS and customizing an Atom processor for the iPad 6 and iPad Mini 3 that could be released in the fall of 2014.

The benefits for Apple are simple; it will be able to customize a chip with the ideal balance between energy efficiency and performance. Apple will also realize generational improvements over Samsung due to the manufacturing advantage of Intel. Intel is already on track to start commercially producing chips on the 14nm process at the end of this year and Samsung has begun to test 14nm products this year meaning Intel will have about a year advantage over Samsung. Each generation down allows for greater performance and energy efficiency, so with Apple receiving the cutting edge manufacturing process for its chips, it gains a performance advantage over Samsung and can start gaining market share.

Intel gets the iPad business and instant market share in the tablet market. Apple sold almost 23 million units in 2012 and with the growth of the tablet market, even if it just holds its market share, it will be shipping something like 60 million units in 2014. That business is worth approximately $1.2 billion to Intel and provides the opportunity to expand the partnership into the iPhone easily tripling the revenues from Apple for Intel. Apple is expected to sell 75 million low-cost smartphones in 2014 along with the sales of the flagship iPhone 6. Both of these products are worth approximately $3 billion in sales to Intel and well worth the trouble of customizing chips for iOS products. I see 2014 as a stellar year for Intel with great growth potential in the mobile space due to growth in the Windows OS and taking on Apple as a new customer.

In an earlier article I wrote on Intel, I suggested the market is punishing the stock for not being successful in the mobile market, for "missing the boat on mobile." Intel's Price/Earnings multiple is currently 12.09 when the 5-year average for the company is 16. If Intel earns Apple as a customer not only will the company grow revenues by over $3 billion, it will most likely earn a multiple expansion as it proves to Wall Street that it can and will compete in the mobile market. This is the likely scenario as Intel now has a product that outperforms other chips and will retain a manufacturing advantage over Samsung and TSMC for the foreseeable future.

Source: Intel Can Give Apple The Edge In Mobile