Apple And The Coming Leveling Of The Semiconductor Giants

| About: Apple Inc. (AAPL)

There is always an inherent instability built into the Semiconductor Industry that is a function of the long lead times to build massive factories that cost billions of dollars. The trick for OEMs like Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) is to use a level playing field strategy in order to lower costs beyond the control of the manufacturers. With Intel's (NASDAQ:INTC) announcement of low utilization and leaving the shell of Fab 42 empty for who knows how long, the stage is set for Apple to negotiate even lower costs and to move Intel towards a mobile world that is much lower in margin than what was thought conceivable even in the Otellini days. Apple now has three large courtiers and all are desperate to keep ahead of their rivals. If we didn't know better, Tim Cook had this all planned from the beginning.

Paul Otellini's greatest mistake was to turn away Steve Jobs offer of building Apple's original ARM (NASDAQ:ARMH) processor at low margins. Otellini's explanation in the Atlantic Monthly magazine does not fly with long time semiconductor protocol, which says you reach for the bird in the hand and let Moore's Law drive you to profitability on the next spin. Otellini held out because he believed that a more powerful x86 would win mobile down the line as the market heated up and no one, not even Apple would be able to resist x86 at the end of the day.

It was somewhat logical to imagine that if Jobs was desperate to move the OSX MAC line away from a lagging PowerPC to x86 that he also must realize that nothing stood in the way of Intel conquering Mobile. A confident Intel with its army of engineers excelled at performance and even performance/watt when one stacks up the Xeon processor against any other surviving processors. But mobile needed a lot less performance and more craftsmanship in the integration of all the select SOC components. Even Micron (NASDAQ:MU) woke up to the changes and reoriented their business model to mobile DRAM and NAND.

Apple has expanded their Fab footprint from Samsung to TSMC (NYSE:TSM) as their business risk shifts away from pushing back on the Android horde to spreading their logistics bets on multiple suppliers. Apple has built a castle wall around the top 30% of the market that wants the latest technology that is easily found in a store not far from the high income earners. This top 30% will now desire Apple's latest processor iteration built by Samsung, TSMC and soon Intel at margins that nVidia (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM) and other processor vendors could only wish.

I was meeting with an old PC friend recently. He lived the wars of the first 12 years of the PC industry and his summary of Intel's success was that by the time Intel got to the 486 they were riding Moore's Law curve. What he meant was that Intel owned a disproportionate share of the profits that occur when you are at the front end of the process technology shipping large volumes. Intel still gets that for Xeon and Haswell (soon Broadwell). However the tides are shifting and the leading edge is moving into Apple's fortress.

Intel's dilemma at the moment is that TSMC is forecast to grow double digits this coming year after a strong 2013, while Samsung, along with Micron are enjoying significant upsides in NAND Flash and DRAM. Growth is everywhere but at Intel. Tim Cook has the chance of a lifetime to negotiate a deal with Intel that puts him the driver's seat of Mobile for years to come, even getting early, exclusive access to the leading edge process at terms that improve on a daily basis as Intel dawdles.

Intel's drubbing in the stock market could flip at the signing of a deal as Wall St. is most interested in the company finally leveraging its true key Asset: the process technology building high volumes of processors regardless of whether they are x86 or ARM based. A touch of Agnosticism would go a long way towards Intel's revival.

Apple's completion of its worldwide build out of its carrier channels with the launch of DoCoMo and China Mobile (NYSE:CHL) will now give Tim Cook time to change his focus back to logistics and the tremendous value add that can occur by leveling the Semiconductor Foundry Playing Field with the three largest competitors all working for him. As I mentioned, it would not be surprising if this was Cook's plan from the beginning.

Disclosure: I am long AAPL, INTC, QQQ. 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.