I think that Apple will have no other choice but to buy its way into the fab business. Production volume is getting too massive. Apple is at a f*cked if you do, f*cked if you don't crossroads. Chip fab is the weak link in Apple's chain. Will Apple ever get what it really needs from another manufacturer? I doubt it. At the very least Apple needs more control over the fab plant and its not going to get it unless it buys the plant.
This aint your Grandpa's Apple...
I can't go with that. It's a very complex business. Just because you think Apple needs to do this doesn't mean that they can do this. Even Intel is finding it difficult to invest in new fabs by themselves. It's thought that the next generation may cost close to $12 billion a pop. You haven't given a cogent reason why they should do this.
There are a number of companies with decades of experience in building and running fabs. Apple has none. Even those companies have problems meeting their standards. TSMC often has problems, and runs behind with every new process technology. Look to the problems Nvidia and ATI have had over the years. Golbal foundries is worse. IBM is pretty good, but doesn't have the production capability. Intel is the best, and can do whatever they need to.
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
The market cap of several of the pure-play foundries are in the single digit billion range. For example UMC is only $4.7B and is sometimes the rumored takeover target of Qualcomm. Of course they NEED about another $8B (if I recall correctly) in CAPEX to get to the 20nm process. TowerJazz is only 181M if all apple wants is to acqui-hire a company that is already in the foundry business (although not in the CPU one they are a ARM licensee) to manage new fabs. That's a longer road than buying UMC but UMC has a asston of 40nm stuff Apple probably can't use.
You miss the point. Apple keeps that much cash (and other liquid assets) for being able to make investments quickly, that is: being flexible.
If you tell me you want to invest billion in a production plant, that means exactly the opposite. Flexibility is at Apple's heart, that's what they have always been used to!
You must always consider the culture of a company. A company that has always followed, from the very beginning, a "make and buy" approach, and is currently really successful, can't change its colture so easily!
They decided to not be integrated upstream, because that reduces flexibility (see the Nokia case: they were so focused on containing costs and standardizing components that they missed the change in the market). They preferred instead a downstream integration (with the DOS and the Online Store), to be closer to the market and consumers.
Remember that Apple did, in fact, tried to build its own manufacturing plant, in the early years... And that idea was a complete failure. Because they simply weren't used to that! They could have hired hundreds of new engineers, but that would have not helped.
See also what is happening with iCloud: even if it's still more reliable than Mobile Me, it often goes down. Because you may have the best people working, but if you're not specialized in online services (because that is not in your core competencies) you *will* have troubles.
In the past, authors who were supporting the "make" approach, used arguments like: it gives you more margins (but yet, Apple already has huge margins: EBIT margin of 35%) and fits best your needs (but most components are standardized, and Apple works together with its partners to develop them).
And when you have an impressive ROI of 37%, which is ~2.5 times the industry average, and thus a proven competitive advantage, why change?
This doesn't mean, however, that Apple can't invest in its manufacturers. Actually, they should acquire stakes, to gain tighter control (and also help avoiding the issues with breaking contracts). However, they don't need the majority of the company.
PS: I'm a business student, graduating next summer. I may not know a lot about technical details of chips (I know nothing, actually), but I deal with topics like innovation management and supply chain management every day or so...
--EDIT
@Melgross got the point. That's exactly what I was thinking about when I talked of "corporate culture".
Re: "Such a transition away from Samsung is expected to have shockwaves through the industry."
Really? Headlines yes. Shockwaves only through Samsung's chip division.
And presumably, Samsung would continue to make older AX chips like the A5 / A5X / A6 / A6X for a few years. So the total transition away from Samsung for all AX manufacturing business would take 2 or 3 years after the TSMC chips (A7 / A7X ?) volume production begins.
I wouldn't be surprised if the A7 / A7X will be 64-bit dual / quad core designs. Dual core for iPhone, iPad, iPod touch, Apple TV. Quad core for MacBook Air running OS X 10.9.
Shock waves because they will take so much of TSMC's production that smaller players will have a problem getting production for themselves. This isn't the first time this happened. Apple buys so much flash that other companies have often had to wait, and have had to pay more. Same thing with screens, and even shipping last holiday, when Apple bought all the air shipping space from carriers working in Asia.
The market cap of several of the pure-play foundries are in the single digit billion range. For example UMC is only $4.7B and is sometimes the rumored takeover target of Qualcomm. Of course they NEED about another $8B (if I recall correctly) in CAPEX to get to the 20nm process. TowerJazz is only 181M if all apple wants is to acqui-hire a company that is already in the foundry business (although not in the CPU one they are a ARM licensee) to manage new fabs. That's a longer road than buying UMC but UMC has a asston of 40nm stuff Apple probably can't use.
Qualcomm is in the same boat. They need more capacity than TSMC is willing to promise.
On the other hand, even AMD/ATI is fabless after spinning off Global Foundries.
The AMD deal shows that having your own foundry isn't always a profitable thing. Apple wouldn't be needing to make a big profit. But Apple being who they are would want to make a small one so that the business wouldn't fall into the red.
But it could easily cost them $10 billion to start. How many chips would they need to produce to pay that back, including the running costs? About a billion chips. So that would be about three years production, not including running costs. So say five years, maybe. But that wouldn't include bi-yearly major plant upgrades to a new process technology. And wait, you can't upgrade a plant while using it! So that means another plant.
And if things don't go according to schedule, uh oh!
This is beginning to get very expensive, even for Apple.
If Apple needs to go down this road the sooner started the better. TI is going to cut 1700 jobs as they move away from OMAP. If they aquihire a functioning fab management team to build a new fab in texas it could work.
UMC is in the process of building out their sub 28nm capabilities so I have no clue what the hell you are smoking. Are you stating that UMC is licensing IBM's 14nm and 20nm FinFET tech only to sit on it? The reason they are offering 10% equity stakes is because the need the capital injection to build out their capacity...although I think they are claiming they are skipping 20nm planar to jump to 14nm FinFET. Certainly Apple can use their 28nm planar capacity and UMC has stated it has developed 20nm planar capabilities but aren't going to offer them due to lack of interest.
The question is also whether Apple is also ready to go 3D with the A7 or if 20nm planar is a better fit for where they are at. Because I guarandamntee you that if Apple went to UMC and asked for billions worth of 20nm planar capacity UMC and offered billions of aid to build the fabs that they would reconsider the direct jump to 14nm FinFET.
ASML also offered equity stake which Apple could also buy into (Intel bought 15% for $3B) earlier this year to get a starting push.
Yes, I know Tower does mostly CMOS and they specialize in SiGe not GaAs. However they do have the operational knowledge of running fabs although how well that translates into the volume Apple needs is debatable. Maybe it's not as good a fit as UMC but I think it's kinda like buying the very small PA Semi, not for the product they made at the time but because of other knowledge. In this case operational rather than technical...although the RF CMOS expertise is likely useful the Apple as well. That they have some SGOI experience helps too.
UMC is the better fit but as I said, Qualcomm is the most rumored partner for equity and a lock on UMC capacity. Apple wont likely want to get into a bidding war with Qualcomm to buy UMC or even UMC capacity unless it has no choice in the matter. Pursuing a smaller company and building out their own capabilities seem more in line with what they do.
Being an IDM is risky. Being fabless is risky. Between the two Apple has more supply constraint issues than worries about how to fill capacity.
I don't see either of those companies ramping up to meet Apple's capacity needs. It also takes experience at running those production numbers, and neither has it. Maybe in a few years they may get it, but that's just a guess, as they may not. Apple isn't usually in the business of nurturing companies along in an area critical to Apple's business. And after the problems with Motorola and later Freescale, I don't think they ever want to experience that again. And relying on small inexperienced fabs isn't something I see them doing.
This is why I don't see them going it on their own. They would have all of those problems.
I can't go with that. It's a very complex business. Just because you think Apple needs to do this doesn't mean that they can do this. Even Intel is finding it difficult to invest in new fabs by themselves. It's thought that the next generation may cost close to $12 billion a pop. You haven't given a cogent reason why they should do this.
There are a number of companies with decades of experience in building and running fabs. Apple has none. Even those companies have problems meeting their standards. TSMC often has problems, and runs behind with every new process technology. Look to the problems Nvidia and ATI have had over the years. Golbal foundries is worse. IBM is pretty good, but doesn't have the production capability. Intel is the best, and can do whatever they need to.
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
Let others have that problem? I think you are condemning Apple to bottlenecks for life. Apple is at maximum production right now. If Apple is really leaving Samsung, then Apple will have to front another manufacturer big big bucks ($1 billion will be a drop in the bucket) to take on the risk of increasing production capacity to Apple's needs. TSMC or any other manufacturer may cherish the thought of having Apple's business but they are also not stupid. Fortunes come and go all the time in the tech world and for a company to tie its future too tightly with Apple would be downright silly.
Samsung is vertically integrated and is in a much better position than Apple for long term health of the company. Samsung will eventually eat Apple's lunch if current trends continue.
Just because you think that Apple can't do this doesn't mean it can't be done (or shouldn't be done).
By the way... I don't recall saying that Apple would have to go it alone but I have said that Apple needs much much more control over chip production. it sounds like you assume I meant that Apple has to go and build its own plant and forget about all the others. Nothing could be further from the truth.
... and, yes, Apple might have to gain more control over its displays as well.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
But that has nothing to do with Samsung's manufacturing capacity. Samsung buys Qualcomm's snapdragon SoC's for US LTE only. Most of Samsung devices use Samsung's own Exynos SoC's. And let's not forget, Qualcomm contracted Samsung to produce the S4 when TSMC couldn't keep up with Qualcomm's demand. Samsung is now also producing the S4 SoCs.
The changes of Intel's leadership and the Fabs they are investing into are going make Intel a preferred partner if that finally deciding to give in. Intel will have Fabs capacity sitting idle next year, little to no presence in Mobile and Tablet space in a booming market, Shrinking Desktop and Laptop sales with even slower upgrade cycle. Every single server CPU they made may have been 10 times more profitable then Desktop CPU, but they will still need volume to fill up those capacity.
So Intel either bet they can make the best Mobile chip with x86 and their process, with less profit margin then what they are used to, or give in to Qualcomm or Apple to fill up those Fabs capacity.
We should know the decision soon i think. So this is Apple waiting for Intel's answer.
But that has nothing to do with Samsung's manufacturing capacity. Samsung buys Qualcomm's snapdragon SoC's for US LTE only. Most of Samsung devices use Samsung's own Exynos SoC's. And let's not forget, Qualcomm contracted Samsung to produce the S4 when TSMC couldn't keep up with Qualcomm's demand. Samsung is now also producing the S4 SoCs.
... and yet Melgross believes that somehow or another that TSMC is going to magically take over from Samsung to produce Apple's chips. Hell, even Samsung is at the top of the capacity that they want to give to Apple.
In other words, these guys want Apple's capacity to go no further than the maximum we're seeing right now. Apple might have 10% left before it hits the ceiling.
Great business plan.
My opinion... Apple is going to have think long and hard about the future of the company... but if Cook really is the numbers guy that everyone says he is then he's already staying awake at night thinking about this.
I see a major amount of cash burning in the very near future.
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
When was that? I remember rumors that such a bid was rejected. I can't find the Appleinsider link. Here is one from Macobserver.
Amit is as credible as his suggestion about Intel taking over chip production.
As credible as a factor 10 price hike and a factor 5 in power dissipation.
J.
I guess you don't understand chip production then. While Intel's current chips are clearly more expensive and more power hungry than ARM chips, that's a function of architecture. If Intel were to act as the foundry for an Ax chip designed by Apple, it would not suffer any power dissipation problems (nor would Intel be able to price it much higher than market price). In fact, since Intel's process technology is the most advanced in the industry, an Ax chip produced by Intel would almost certainly have lower power usage than the same chip produced by Samsung (and, since chip cost is proportional to chip area, Intel's chip might well be less expensive, too. Even if Intel insists in an 80% gross margin (compared to 60% on their existing products), it would still not be more than twice the cost of current chips - probably less.
Now, I agree that Intel is unlikely to fab chips for Apple, but it's not for the reasons you cited.
I guess you don't understand chip production then. While Intel's current chips are clearly more expensive and more power hungry than ARM chips, that's a function of architecture. If Intel were to act as the foundry for an Ax chip designed by Apple, it would not suffer any power dissipation problems (nor would Intel be able to price it much higher than market price). In fact, since Intel's process technology is the most advanced in the industry, an Ax chip produced by Intel would almost certainly have lower power usage than the same chip produced by Samsung (and, since chip cost is proportional to chip area, Intel's chip might well be less expensive, too. Even if Intel insists in an 80% gross margin (compared to 60% on their existing products), it would still not be more than twice the cost of current chips - probably less.
Now, I agree that Intel is unlikely to fab chips for Apple, but it's not for the reasons you cited.
You have to wonder, though, what the initial cost would be for Intel to begin fabrication of this Arm chip.
I guess you don't understand chip production then. While Intel's current chips are clearly more expensive and more power hungry than ARM chips, that's a function of architecture. If Intel were to act as the foundry for an Ax chip designed by Apple, it would not suffer any power dissipation problems (nor would Intel be able to price it much higher than market price). In fact, since Intel's process technology is the most advanced in the industry, an Ax chip produced by Intel would almost certainly have lower power usage than the same chip produced by Samsung (and, since chip cost is proportional to chip area, Intel's chip might well be less expensive, too. Even if Intel insists in an 80% gross margin (compared to 60% on their existing products), it would still not be more than twice the cost of current chips - probably less.
Now, I agree that Intel is unlikely to fab chips for Apple, but it's not for the reasons you cited.
The poster did have the point. Not only would Intel have to fab for Apple, Intel would essentially have to invest heavily in ARM. Intel won't go off and just fab Apple chips for the fun/money. It would have to be a committed move to drop x86 for mobile and go to ARM, essentially killing off Intel x86 for mobile... If you're talking the volumes that Intel would do for Apple, it would be somewhat pointless to continue x86 for mobile.
I said it in the past few years. x86 for mobile is a big, big gamble and I am now more than ever, certain that Intel will not pull it off 2013-2018. Just not in the face of where ARM is going to be in 2015, let alone tomorrow.
All they have to do is make "N" models of their existing crap that also look exactly like Apple designs (just different designs than the ones in the case).
You miss the point. Apple keeps that much cash (and other liquid assets) for being able to make investments quickly, that is: being flexible.
If you tell me you want to invest billion in a production plant, that means exactly the opposite. Flexibility is at Apple's heart, that's what they have always been used to!
Except that apple has made billion dollar capex in the past to guarantee capacity.
And investing 10% of the cash hoard stuck overseas in a long term strategic move is not unreasonable.
Take UMC...buy UMC with non-USA money, build fabs in Austin using UMC expertise. Essentially you got about $2b of value back into the us untaxed. AND you have the added PR bonus of US jobs creation...and chips are one of those things we can profitably manufacture in the US.
Except that apple has made billion dollar capex in the past to guarantee capacity.
And investing 10% of the cash hoard stuck overseas in a long term strategic move is not unreasonable.
Take UMC...buy UMC with non-USA money, build fabs in Austin using UMC expertise. Essentially you got about $2b of value back into the us untaxed. AND you have the added PR bonus of US jobs creation...and chips are one of those things we can profitably manufacture in the US.
Again, UMC builds chips. Apple "builds ideas: they develop and design hardware and software, but they don't manufacture it.
So whatever argument you take about economic convenience is pointless.
If you want some theory... That is the basic of corporate finance! When considering an investment, you have to look at it under 3 points of views:
1. economic convenience (if the NPV of the investment is > 0 - or other methods)
2. financial sustainability (how to finance the investment - debt or equity? - and the costs of the financing)
3. general impact on the company
Let's say that building chips in-house is economically convenient, as you can get higher margins on a strategic component and you can reduce transaction costs. I take this for granted. Apple shouldn't have big troubles in financing it as well, as they do have a lot of cash (and the "opportunity costs" of using that cash are likely lower than the benefits).
It's in the third point where the investment plan fails. There are hundreds of example of companies that made big investments that were excellent under the first 2 aspects, but proved to be a total failure in the following years. That is because, again, Apple doesn't have any experience in manufacturing. What if the chips were more expensive than what planned? Or, even worse, what if they were faulty (not unlikely, if they aren't experts... again, see what's happened with Mobile Me and what's happening with iCloud, which is still pretty unstable). Even, even worse: what if they weren't able to produce volumes that are big enough? You know: you can't start producing 100 million chips per year from zero... The impact on the statements of income would be bad as well: investing in plants means increasing the operating leverage, and thus making the cost structure more rigid. Eventually, having your own manufacturing plant means that you will have to use it: you are putting a lot of money into a technology, without being able to change it completely in the next years.
The AMD deal shows that having your own foundry isn't always a profitable thing. Apple wouldn't be needing to make a big profit. But Apple being who they are would want to make a small one so that the business wouldn't fall into the red.
I would argue if AMD had not gotten hammered by the Core2 they wouldn't have spun off their fabs because they would have needed all of that capacity.
I don't see either of those companies ramping up to meet Apple's capacity needs. It also takes experience at running those production numbers, and neither has it.
You do know that UMC was the #2 foundry behind TSMC before being overtaken this year by GF right?
They are more than capable of volume production.
And after the problems with Motorola and later Freescale, I don't think they ever want to experience that again. And relying on small inexperienced fabs isn't something I see them doing.
This is why I don't see them going it on their own. They would have all of those problems.
I would argue that given their experience as a fabless company with IBM, Freescale and now Samsung that going the IDM route starts looking pretty good for the volumes they are talking about.
And also, regarding your point about upgrading a fabs you do know that a fab can be composed of multiple modules and each can be updated independently and make different stuff. That also means that they can expand and contract their capacity over time in a more granular fashion than you imply.
To me, apple investing billions into a fab is not any different than apple investing billions into iCloud server farms and I would argue they have a far better handle on hardware production than servers.
Comments
I can't go with that. It's a very complex business. Just because you think Apple needs to do this doesn't mean that they can do this. Even Intel is finding it difficult to invest in new fabs by themselves. It's thought that the next generation may cost close to $12 billion a pop. You haven't given a cogent reason why they should do this.
There are a number of companies with decades of experience in building and running fabs. Apple has none. Even those companies have problems meeting their standards. TSMC often has problems, and runs behind with every new process technology. Look to the problems Nvidia and ATI have had over the years. Golbal foundries is worse. IBM is pretty good, but doesn't have the production capability. Intel is the best, and can do whatever they need to.
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
Quote:
Originally Posted by nht
And there are over $100 billion reasons they can.
The market cap of several of the pure-play foundries are in the single digit billion range. For example UMC is only $4.7B and is sometimes the rumored takeover target of Qualcomm. Of course they NEED about another $8B (if I recall correctly) in CAPEX to get to the 20nm process. TowerJazz is only 181M if all apple wants is to acqui-hire a company that is already in the foundry business (although not in the CPU one they are a ARM licensee) to manage new fabs. That's a longer road than buying UMC but UMC has a asston of 40nm stuff Apple probably can't use.
You miss the point. Apple keeps that much cash (and other liquid assets) for being able to make investments quickly, that is: being flexible.
If you tell me you want to invest billion in a production plant, that means exactly the opposite. Flexibility is at Apple's heart, that's what they have always been used to!
You must always consider the culture of a company. A company that has always followed, from the very beginning, a "make and buy" approach, and is currently really successful, can't change its colture so easily!
They decided to not be integrated upstream, because that reduces flexibility (see the Nokia case: they were so focused on containing costs and standardizing components that they missed the change in the market). They preferred instead a downstream integration (with the DOS and the Online Store), to be closer to the market and consumers.
Remember that Apple did, in fact, tried to build its own manufacturing plant, in the early years... And that idea was a complete failure. Because they simply weren't used to that! They could have hired hundreds of new engineers, but that would have not helped.
See also what is happening with iCloud: even if it's still more reliable than Mobile Me, it often goes down. Because you may have the best people working, but if you're not specialized in online services (because that is not in your core competencies) you *will* have troubles.
In the past, authors who were supporting the "make" approach, used arguments like: it gives you more margins (but yet, Apple already has huge margins: EBIT margin of 35%) and fits best your needs (but most components are standardized, and Apple works together with its partners to develop them).
And when you have an impressive ROI of 37%, which is ~2.5 times the industry average, and thus a proven competitive advantage, why change?
This doesn't mean, however, that Apple can't invest in its manufacturers. Actually, they should acquire stakes, to gain tighter control (and also help avoiding the issues with breaking contracts). However, they don't need the majority of the company.
PS: I'm a business student, graduating next summer. I may not know a lot about technical details of chips (I know nothing, actually), but I deal with topics like innovation management and supply chain management every day or so...
--EDIT
@Melgross got the point. That's exactly what I was thinking about when I talked of "corporate culture".
Shock waves because they will take so much of TSMC's production that smaller players will have a problem getting production for themselves. This isn't the first time this happened. Apple buys so much flash that other companies have often had to wait, and have had to pay more. Same thing with screens, and even shipping last holiday, when Apple bought all the air shipping space from carriers working in Asia.
The AMD deal shows that having your own foundry isn't always a profitable thing. Apple wouldn't be needing to make a big profit. But Apple being who they are would want to make a small one so that the business wouldn't fall into the red.
But it could easily cost them $10 billion to start. How many chips would they need to produce to pay that back, including the running costs? About a billion chips. So that would be about three years production, not including running costs. So say five years, maybe. But that wouldn't include bi-yearly major plant upgrades to a new process technology. And wait, you can't upgrade a plant while using it! So that means another plant.
And if things don't go according to schedule, uh oh!
This is beginning to get very expensive, even for Apple.
If it were only that simple. But it isn't.
No no no!!!
I don't see either of those companies ramping up to meet Apple's capacity needs. It also takes experience at running those production numbers, and neither has it. Maybe in a few years they may get it, but that's just a guess, as they may not. Apple isn't usually in the business of nurturing companies along in an area critical to Apple's business. And after the problems with Motorola and later Freescale, I don't think they ever want to experience that again. And relying on small inexperienced fabs isn't something I see them doing.
This is why I don't see them going it on their own. They would have all of those problems.
Quote:
Originally Posted by melgross
I can't go with that. It's a very complex business. Just because you think Apple needs to do this doesn't mean that they can do this. Even Intel is finding it difficult to invest in new fabs by themselves. It's thought that the next generation may cost close to $12 billion a pop. You haven't given a cogent reason why they should do this.
There are a number of companies with decades of experience in building and running fabs. Apple has none. Even those companies have problems meeting their standards. TSMC often has problems, and runs behind with every new process technology. Look to the problems Nvidia and ATI have had over the years. Golbal foundries is worse. IBM is pretty good, but doesn't have the production capability. Intel is the best, and can do whatever they need to.
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
Let others have that problem? I think you are condemning Apple to bottlenecks for life. Apple is at maximum production right now. If Apple is really leaving Samsung, then Apple will have to front another manufacturer big big bucks ($1 billion will be a drop in the bucket) to take on the risk of increasing production capacity to Apple's needs. TSMC or any other manufacturer may cherish the thought of having Apple's business but they are also not stupid. Fortunes come and go all the time in the tech world and for a company to tie its future too tightly with Apple would be downright silly.
Samsung is vertically integrated and is in a much better position than Apple for long term health of the company. Samsung will eventually eat Apple's lunch if current trends continue.
Just because you think that Apple can't do this doesn't mean it can't be done (or shouldn't be done).
By the way... I don't recall saying that Apple would have to go it alone but I have said that Apple needs much much more control over chip production. it sounds like you assume I meant that Apple has to go and build its own plant and forget about all the others. Nothing could be further from the truth.
... and, yes, Apple might have to gain more control over its displays as well.
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Originally Posted by melgross
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
But that has nothing to do with Samsung's manufacturing capacity. Samsung buys Qualcomm's snapdragon SoC's for US LTE only. Most of Samsung devices use Samsung's own Exynos SoC's. And let's not forget, Qualcomm contracted Samsung to produce the S4 when TSMC couldn't keep up with Qualcomm's demand. Samsung is now also producing the S4 SoCs.
So Intel either bet they can make the best Mobile chip with x86 and their process, with less profit margin then what they are used to, or give in to Qualcomm or Apple to fill up those Fabs capacity.
We should know the decision soon i think. So this is Apple waiting for Intel's answer.
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Originally Posted by tooltalk
But that has nothing to do with Samsung's manufacturing capacity. Samsung buys Qualcomm's snapdragon SoC's for US LTE only. Most of Samsung devices use Samsung's own Exynos SoC's. And let's not forget, Qualcomm contracted Samsung to produce the S4 when TSMC couldn't keep up with Qualcomm's demand. Samsung is now also producing the S4 SoCs.
... and yet Melgross believes that somehow or another that TSMC is going to magically take over from Samsung to produce Apple's chips. Hell, even Samsung is at the top of the capacity that they want to give to Apple.
In other words, these guys want Apple's capacity to go no further than the maximum we're seeing right now. Apple might have 10% left before it hits the ceiling.
Great business plan.
My opinion... Apple is going to have think long and hard about the future of the company... but if Cook really is the numbers guy that everyone says he is then he's already staying awake at night thinking about this.
I see a major amount of cash burning in the very near future.
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Originally Posted by melgross
Apple pays suppliers billions every year to upgrade plant and equipment, hire and train workers, and buy equipment for their own use. It's believed that they recently made a $1 billion payment to TSMC. TSMC has been getting better at meeting schedules, and is the largest independent fab out there. It's believed that they could devote one or two fabs for Apple production.
It would be insane for Apple to go this alone.
Even Samsung buys SoC's from other companies for their own devices. Apple's biggest bottlenecks are in displays. So you might as well say that they should build their own plants for that as well. And what about cases? They've had problems with those too.
By not building those by themselves, they have saved billions of dollars. They don't need to deal with plant and infrastructure. They don't have to deal with the workers. They don't have to deal with old equipment and breakdowns. I could go on. This saves them a lot of headaches. Being vertically integrated is a problem. Let others have that problem
When was that? I remember rumors that such a bid was rejected. I can't find the Appleinsider link. Here is one from Macobserver.
I guess you don't understand chip production then. While Intel's current chips are clearly more expensive and more power hungry than ARM chips, that's a function of architecture. If Intel were to act as the foundry for an Ax chip designed by Apple, it would not suffer any power dissipation problems (nor would Intel be able to price it much higher than market price). In fact, since Intel's process technology is the most advanced in the industry, an Ax chip produced by Intel would almost certainly have lower power usage than the same chip produced by Samsung (and, since chip cost is proportional to chip area, Intel's chip might well be less expensive, too. Even if Intel insists in an 80% gross margin (compared to 60% on their existing products), it would still not be more than twice the cost of current chips - probably less.
Now, I agree that Intel is unlikely to fab chips for Apple, but it's not for the reasons you cited.
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Originally Posted by jragosta
I guess you don't understand chip production then. While Intel's current chips are clearly more expensive and more power hungry than ARM chips, that's a function of architecture. If Intel were to act as the foundry for an Ax chip designed by Apple, it would not suffer any power dissipation problems (nor would Intel be able to price it much higher than market price). In fact, since Intel's process technology is the most advanced in the industry, an Ax chip produced by Intel would almost certainly have lower power usage than the same chip produced by Samsung (and, since chip cost is proportional to chip area, Intel's chip might well be less expensive, too. Even if Intel insists in an 80% gross margin (compared to 60% on their existing products), it would still not be more than twice the cost of current chips - probably less.
Now, I agree that Intel is unlikely to fab chips for Apple, but it's not for the reasons you cited.
You have to wonder, though, what the initial cost would be for Intel to begin fabrication of this Arm chip.
The poster did have the point. Not only would Intel have to fab for Apple, Intel would essentially have to invest heavily in ARM. Intel won't go off and just fab Apple chips for the fun/money. It would have to be a committed move to drop x86 for mobile and go to ARM, essentially killing off Intel x86 for mobile... If you're talking the volumes that Intel would do for Apple, it would be somewhat pointless to continue x86 for mobile.
I said it in the past few years. x86 for mobile is a big, big gamble and I am now more than ever, certain that Intel will not pull it off 2013-2018. Just not in the face of where ARM is going to be in 2015, let alone tomorrow.
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Originally Posted by Tallest Skil
All they have to do is make "N" models of their existing crap that also look exactly like Apple designs (just different designs than the ones in the case).
Are you saying Apple design looks like crap?
Except that apple has made billion dollar capex in the past to guarantee capacity.
And investing 10% of the cash hoard stuck overseas in a long term strategic move is not unreasonable.
Take UMC...buy UMC with non-USA money, build fabs in Austin using UMC expertise. Essentially you got about $2b of value back into the us untaxed. AND you have the added PR bonus of US jobs creation...and chips are one of those things we can profitably manufacture in the US.
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Originally Posted by nht
Except that apple has made billion dollar capex in the past to guarantee capacity.
And investing 10% of the cash hoard stuck overseas in a long term strategic move is not unreasonable.
Take UMC...buy UMC with non-USA money, build fabs in Austin using UMC expertise. Essentially you got about $2b of value back into the us untaxed. AND you have the added PR bonus of US jobs creation...and chips are one of those things we can profitably manufacture in the US.
Again, UMC builds chips. Apple "builds ideas: they develop and design hardware and software, but they don't manufacture it.
So whatever argument you take about economic convenience is pointless.
If you want some theory... That is the basic of corporate finance! When considering an investment, you have to look at it under 3 points of views:
1. economic convenience (if the NPV of the investment is > 0 - or other methods)
2. financial sustainability (how to finance the investment - debt or equity? - and the costs of the financing)
3. general impact on the company
Let's say that building chips in-house is economically convenient, as you can get higher margins on a strategic component and you can reduce transaction costs. I take this for granted. Apple shouldn't have big troubles in financing it as well, as they do have a lot of cash (and the "opportunity costs" of using that cash are likely lower than the benefits).
It's in the third point where the investment plan fails. There are hundreds of example of companies that made big investments that were excellent under the first 2 aspects, but proved to be a total failure in the following years. That is because, again, Apple doesn't have any experience in manufacturing. What if the chips were more expensive than what planned? Or, even worse, what if they were faulty (not unlikely, if they aren't experts... again, see what's happened with Mobile Me and what's happening with iCloud, which is still pretty unstable). Even, even worse: what if they weren't able to produce volumes that are big enough? You know: you can't start producing 100 million chips per year from zero... The impact on the statements of income would be bad as well: investing in plants means increasing the operating leverage, and thus making the cost structure more rigid. Eventually, having your own manufacturing plant means that you will have to use it: you are putting a lot of money into a technology, without being able to change it completely in the next years.
I would argue if AMD had not gotten hammered by the Core2 they wouldn't have spun off their fabs because they would have needed all of that capacity.
You do know that UMC was the #2 foundry behind TSMC before being overtaken this year by GF right?
They are more than capable of volume production.
I would argue that given their experience as a fabless company with IBM, Freescale and now Samsung that going the IDM route starts looking pretty good for the volumes they are talking about.
And also, regarding your point about upgrading a fabs you do know that a fab can be composed of multiple modules and each can be updated independently and make different stuff. That also means that they can expand and contract their capacity over time in a more granular fashion than you imply.
To me, apple investing billions into a fab is not any different than apple investing billions into iCloud server farms and I would argue they have a far better handle on hardware production than servers.
Originally Posted by Nathillien
Are you saying Apple design looks like crap?
No, but if you'd read my post you'd know that.