Apple May Enlist Intel As Mobile Chip Supplier To Diversify Away From Samsung

Quick Take

  • Apple may be looking to diversify away from Samsung, which is also its biggest competitor in the mobile space.
  • Intel's well-known manufacturing prowess and capacity could be a boon to Apple as partner, and Intel might be looking to add new mobile products to its portfolio.
  • An additional supplier could foster greater competition in the supply chain, which will in turn help Apple defend its margins better.

Apple's ( AAPL ) rumored search for additional supply partners outside of Samsung ( SSNLF ) may come to an end soon. Intel ( INTC ), the PC chipset giant whose core business has come under threat from the burgeoning demand for portable mobile devices, may be planning to open up its once exclusive fabrication plants to third-party mobile players. The semiconductor giant has already signed on Altera as its first sizable customer for the contract manufacturing business, and is reportedly in talks with "a potential large, unidentified mobile customer" - quite possibly Apple.

The iPhone maker has been rumored to be diversifying its supply chain away from Samsung, in order to reduce its dependence on a company that has become its fiercest rival in the mobile device space. Intel, with whom Apple already has a deal in place for its MacBook chips and whose manufacturing technology is widely considered as the best in the world, will be a strategic fit considering that they do not compete in the same space currently. Having missed the mobile business as its x86-based mobile chipsets fail to gain much traction in the market, Intel will be well served if it manages to leverage its manufacturing prowess to become a major player in the growing foundries business. Meanwhile, Apple will look to bolster its margins by fostering greater competition in its supply chain.

See our complete analysis of Apple here

Samsung's Conflict Of Interest

While many view Apple's moves to diversify its supply chain to be prompted by the ongoing patent litigation with Samsung, we believe that this is more a response to Samsung's growing smartphone sales, which could lead to a conflict of interest in the coming years.

The past year has seen Samsung more than double its smartphone market share to almost 40% in 2012 from about 19% the previous year. With Samsung's smartphone sales growing at a rapid pace and the company acting as its own supplier in many cases, it could pose a dilemma for Samsung if it had to choose between Apple and itself, in case of a supply shortage at its factories. This seems to be the primary reason why Apple is increasingly feeling the need to diversify vendors, as it would mitigate the risk of Samsung prioritizing the supply of its own parts over Apple's.

Considering that Apple is Samsung's chief rival in the smartphone market, it does not need the excuse of a supply shortage to cut Apple off at the source. The ongoing patent dispute only gives Samsung more reason to use its advantageous supply-chain position to Apple's detriment. Samsung is currently the sole supplier of microprocessors used in the iPhone and the iPad, and its components make up a significant 26% of the iPhone's total costs.

Diversification Hedges The Supply Risk

Additionally, Apple needs to secure supplies for its products, the demand for which seems to be touching new highs every year. Last year, the company sold almost 136 million iPhones, accounting for about 25% of the smartphone market and growing by more than 45% y-o-y. With a lot of potential left to be tapped in the emerging markets such as China and India, Apple could launch a cheaper iPhone in the coming months, which together with the iPad mini, might put additional pressure on its supply chain. With demand expected to remain strong, it makes sense for Apple to diversify and lessen exposure to any one supplier. Finding additional suppliers is essential since it provides Apple more choices and gives it greater control over its supply chain, especially at a time when burgeoning demand for mobile devices puts the supply side at a greater risk of not meeting demand.

Of particular interest to Apple could be the ongoing discussions about a potential deal between Foxconn and Sharp that would help Sharp compete better and give Apple an opportunity to decrease its dependence on Samsung, despite the latter acquiring a 3% stake in the display maker. (see Foxconn-Sharp Deal Will Give Apple Greater Control Over Its Supply Chain ) Fostering greater competition in the supply chain will give Apple greater bargaining power and help it control the cost of supplies, thereby supporting its profit margins in the longer term. As the smartphone market gets commoditized over time, we expect Apple's iPhone margins to fall, but a greater supply chain control could mitigate the risk to an extent.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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