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What Apple Is Doing In New York

|Includes:Apple Inc. (AAPL)

There have been a few rumors about what Apple is going to do to get away from fabricating their mobile processors at industry rival Samsung's Fab. Amongst these are rumors that they are negotiating with Intel and that they are looking to invest directly in a fabrication plant in the New York area.

To understand what these rumors could mean, it is important to understand the chip fabrication landscape. There are three leading electronic process development efforts going on the world today that can be categorized as leading edge. They are Intel, TSMC and the IBM Alliance. The IBM Alliance includes major chip developers IBM, Global Foundries, Samsung and a number of other smaller players. This means that Apple currently is designing chips for IBM Alliance technologies and it would be simplest for them to continue to do so.

It just so happens that there is a joint Fab effort in upstate New York that is run by IBM Alliance companies IBM, Global Foundries and Freescale Semiconductor. It would be relatively easy for Apple to get involved in the effort there and have more control over their fabrication destiny.

While becoming an active member of the IBM Alliance process technology and fabrication consortium is an obvious reason for Apple to be interested in upstate New York, it isn't the only possibility. They could also be interested in the area for the same reasons that the IBM Alliance has an effort there: favorable taxes and regulations from the state of New York and access to a sizeable technical talent pool in the New England region. So, it isn't absolutely impossible that they are exploring a partnership with TSMC similar to the one they have with Foxconn for assembling their hardware.

The real question is why are they talking to Intel? The answer to this is that they likely are worried about making a big investment in process technology that will not be competitive in the next few years. Intel has the best fabrication technology period, end of story. Further, there is some risk that IBM and/or TSMC will not be able to continue the huge investments necessary to keep up with Intel's breakneck pace. This is another reason why TSMC is an unlikely choice. Not only would it be more work to ally with TSMC, they have the lowest performing process technology of the three.

This leads me to believe that Apple is weighing the alternatives of becoming a partner in the IBM Alliance and purchasing their chips from Intel going forward. They are weighing the per unit cost of going with Intel against the risk of becoming invested in the very costly business of electronic IC fabrication.

Disclosure: I am long INTC.

Stocks: AAPL