While most analysts continue to focus on the battle between Apple (AAPL) and Samsung (GM:SSNLF) in the smartphone and tablet market a much more interesting strategy is taking place with Apple's ARM (ARMH) based processors. As mentioned in a previous post, the 64-bit A7 processor has elevated Apple into not just a premium consumer position but also as the leader in the corporate space that is about to turn into an adoption wave. Intel (INTC), trying to protect its 64 bit PC Mobile positioning, purposely downplayed its 64 bit capabilities in the tablet and smartphone space in order to allow ultrabooks to get a head of steam. Apple gladly picked up the baton as the premier 64 bit architecture for mobile and thus imprinting the image of mobile processor leadership to not only its faithful followers but to the broader world market. Superior branding will now ripple all the way through to the worldwide Fab Footprint games underway as noted by the Apple - Samsung connection with Global Foundries new Malta Fab in upstate New York. More importantly the pieces are in place to replicate the highly profitable Intel x86 model built in the 1990s.
Wherever they go they create not just a stir but a rethinking by their partners and competitors of how to respond. This past June, Apple announced the long-awaited partnership with TSMC at 20nm with the thought that they were finally going to break free from Samsung, their true mobile competitor. And yet weeks later, we came to find out that Samsung would return as a foundry partner at 14nm. Was Apple changing partners at a whim or was there more to the story? Since that time there has been rumors that Samsung would also supply 20nm wafers. And now we have the GlobalFoundries opportunity managed with Samsung.
GlobalFoundries' desire to be a significant player based on the IBM (IBM) and AMD (AMD) technology partnership and massive infusions of money from their lead investor, Abu Dhabi, has not panned out as many expected when the private entity came into being back in 2000. The decline of AMD and the shift of leading edge capacity to mobile through the likes of Apple, Qualcomm (QCOM) and Samsung has for the most part benefited TSMC and Samsung. Qualcomm's inability to ramp to meet its demands at 28nm last year did send them to Global but still not at a volume that would fill the Fab.
So now Global will be drawn into Samsung's orbit and perhaps become an acquisition target as 14nm moves to 10nm and the cost to stay in the game overwhelms all but the most endowed, such as TSMC, Intel and Samsung. All of this game changing though comes at the direction of Apple who is out in front with the most profitable mobile model and more upside to come. With its 64 bit ARM roadmap about to expand, Apple has the luxury of building larger die that stretch the performance curve upward and in synchronicity with process technology improvements. Each increase in performance and capability will be effectively driving into the heart of Intel's PC mobile processor roadmap that are sold at premium prices of $200 and more. This profit can be absorbed by Apple if they are able to embed these ARM processors into mobile platforms that can replace PCs in most corporate environments. Logically the next platform to do this would be an iPad "Pro" with a larger screen and wedged in Apple's lineup between the Mac Air and Mac Book Pro. Benchmarks are sure to follow that prove its capabilities.
Few people remember that in the 1990s Intel built the business model that made them the world's most profitable semiconductor company. It was based on pushing their latest Pentium processor into their leading edge process technology and by selling a mix that encompassed the whole performance yield of the wafer. With process improvements coming every few months, the Mhz curve shifted and a transition took place to introduce a new high end product while obsoleting the old. Their competitors, mainly AMD were usually left choking on obsolete inventory that had to be sold at firesale prices.
At the top end of the performance curve, representing perhaps 10% of the wafer yield, would be the latest processor selling for as much as $1000 or more. Lower speed processors would sell anywhere from $100 to $700 leading to gross margins that were above 65%. Intel's valuation then was as much about growth as it was about controlling over 90% of the industry's leading edge capacity. Intel still has a large percentage but it is shrinking as the ARM mobile processor units outrun that of Xeon Servers and x86 Client processors. And while Intel intends to be a volume mobile player with Atom, it will not be able to recreate the high margin model because the processor will never find a home in Apple's premium iPhones or iPads.
Apple is now in the driver's seat to take Intel's place with the A7 and future processors and perhaps their own in-house wireless solutions that may one day replace Qualcomm. With the addition of Global's Malta Fab to its stable of Foundries, Apple is in essence communicating to the Semiconductor Industry that it will soak up the excess capacity at the lowest price until things are right-sized. The implication is that the other ARM mobile chip vendors and perhaps Intel will be at a cost disadvantage in the coming year. TSMC, while a supplier to Apple at 20nm, will likely concentrate on higher margin opportunities as the Samsung- Global partnership consolidates its hold on Apple with the prospect of making more money at a later date. Would Apple be concerned about this? Likely not for they plan to own the market for premium silicon.
If Apple is able to receive a premium for its iPad Pro next year due to a more advanced A8 processor and thus effectively migrating not only the Intel ultrabook PC but also the $200+ Broadwell ULV processor residing inside it over to its side of the ledger, then we will have witnessed the beginnings of the transition to the premium ARM market under the tutelage of the one licensee who is more than just a fabless player. With its increased profits, Apple then surely will fund the treadmill in mobile that will keep them in the pole position for years to come. In addition, coming soon is likely a 64 bit server design that will allow them to replicate the feat with an efficient processor designed to replace $2000-$6000 Intel Xeon processors that will run their iCloud. Google (GOOG) and Amazon (AMZN) are you listening?