1 Important Reason Why Intel's Broadwell Production Delay Is A Negative

Oct.23.13 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) is undoubtedly the leading PC chipmaker, but the fact that the company has been unable to crack the mobile market is well-known. However, it looks like Intel might lose a very important customer that uses its PC chips in the foreseeable future. Apple (NASDAQ:AAPL) has been designing its own chips for iPhones and iPads, and it might not be long before it does the same for its MacBooks.

So when Intel CEO Brian Krzanich said on a recent conference call that Intel will start producing its Broadwell PC chips in the first quarter of next year rather than this year, the implications were deep. According to CNET, "the chip is the first manufactured at 14 nanometers, or billionths of a meter, which puts Intel at least a year ahead of rivals." Thus, this effectively means that Intel has fallen behind the innovation curve by some time and this could prove to be a concern.

Why this might happen

Apple's uses a number of companies for its latest processor. For example, the latest A7 chip powering the iPhone 5S is designed by Apple, it licenses 64-bit architecture from ARM and is made by Samsung (OTC:SSNLF), with Intel nowhere in the scene.

As mobile devices become the primary users of semiconductors, several original equipment manufacturers (OEMs) have decided to go for alternatives to Intel. Despite Intel being the flag-bearer in PCs and laptops, there are better options in the market in terms of power and efficiency.

ARM Holdings is especially known for its power-conserving architecture, and that's why Apple has chosen to license ARM Holdings' technology above Intel for its mobile devices. But since ARM's architecture lacks PC-type performance, Apple has stuck to Intel for its Mac needs.

However, if Intel is unable to find a method of conserving more power going forward in its PC chips, Apple might move away from Intel for its desktop devices as well. But Intel doesn't want to lose this account and it has reacted to Apple's need for low-power processors by fast-tracking the development of the technology. However, Apple management is still concerned. As reported by Bloomberg, a uniform chip design across mobile and desktop for Apple couldn't be far away.

Why it could be a big loss

With the decline in PC sales already proving to be a thorn in Intel's flesh, losing Apple as a customer would spark further concerns. As reported by Gartner, MacBooks accounted for 11.6% of PC shipments in the second quarter of 2013 in the U.S. Hence, the loss of a client such as Apple would no doubt dent Intel's business badly.

Apple's A7 processor is the first important move by Apple toward integration of its mobile and PC chips. The company is of the opinion that the 64-bit processor has desktop-class processor architecture. Some might have said that the A7's architecture is not needed at the moment as one of the important advantages of 64-bit is the capability of handling memory in excess of 4GB. Since the iPod, the iPhone or the iPad don't have this amount memory, Apple doesn't exactly need a 64-bit architecture.

But then, developers will now begin optimizing apps for the 64-bit architecture. Hence, when these devices do come to a point where more than 4GB of memory is needed, Apple will be ready. The A7 might not be powerful enough to deliver PC-like performance, but it's no doubt setting the basis for a probable uniform chip design when the day comes.

How long before this happens?

Bloomberg suggests that Apple is working on a version of its tweaked ARM architecture that would run inside MacBooks. Apple's laptop products could stand to gain from the architecture's battery sipping design. However, sources indicate that this change will not happen overnight and might not take place until 2017. According to Engadget,.

"But, as the gulf between 'mobile' and 'desktop' products begins to shrink and the boundaries blend, it would only seem to make sense that Apple would look to leverage its high-profile purchase of P.A. Semi to good use and inch ever closer to being a completely self-reliant corporate entity. We don't think it's any secret that Apple would, if it could, design and manufacture all of its products' components in-house."

Is it a good idea?

Apple's move away from Intel could be a good idea. Ditching Intel will be in line with Apple's vertical integration philosophy. Apple's cash balance is strong enough for it to invest the required amount of capital to develop its own chip for MacBooks. Moreover, Apple has switched chip architectures in the past. Most importantly, it was Tim Cook who engineered the switch to Intel in 2005.

Hence, the 64-bit ARM-based architecture of the A7 chip could be the stepping stone for Apple's move away from Intel's chips for Macs, and Intel's Broadwell delay could be the beginning of that switch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.