Apple, known for its iconic iPhone and the robust MacBook, is all set to embed self-manufactured electronic chips in its electronic devices. For many years, it had been relying on electronic chip makers for meeting its growing demand. In-house manufacturing of electronic chips was a long cherished goal of Apple.

Apple is sitting on a large cash pile. The risk of disruption to its supply chain due to “third party manufactured” electronic chips was always present. Being self-reliant on the production of electronic chips mitigates that risk.

Apple’s electronic chip suppliers include/included Intel, Qualcomm, Synaptics Inc, Cirrus Logic Inc, Imagination Technologies Group Plc and Dialog.

Apple and Qualcomm

Apple and Qualcomm are engaged in a bitter lawsuit. The allegations made by both parties are grave and might result in severe consequences for both companies.

The legal battle surfaced in the media in early 2017. CNBC (20 January 2017) reported:

“Apple is suing Qualcomm for roughly $1 billion, saying Qualcomm has been ‘charging royalties for technologies they have nothing to do with,’ an action the chip maker (Qualcomm) sharply dismissed as groundless”.

In the latest twist (The Verge – 25 September 2018) Qualcomm says that Apple has been stealing its wireless technology for several years in order to eventually rid itself of the need to rely on Qualcomm components.

Qualcomm’s complaint states:

“On information and belief, Apple developed and carried out an intricate plan, beginning at least several years ago and continuing through the present, to steal vast swaths of Qualcomm’s confidential information and trade secrets and to use the information and technology to improve the performance of non-Qualcomm chipset solutions and, in conjunction, the performance of iPhones based on such non-Qualcomm chipset solutions”.

Qualcomm further said that it’s been able to view documents showing that Apple and Intel engineers shared Qualcomm’s source code and other tools.

Apple and Intel

A Business Insider (5 July 2018) report shows that Apple following its strategy of being self-reliant in the production of electronic chips informed Intel that it will not be buying Intel’s 5G Modem chips. The important thing to note is that Apple’s decision prompted Intel to stop producing these chips.

The year 2018 has not been good for Intel so far. The Intel processors manufactured in the past were found to be “vulnerable” to security threats (Spectre, Meltdown and now Foreshadow). This year, Intel’s CEO left amidst revelation of an old office affair, a violation of Intel’s office working policy.

The halt of the production line of 5G Modem chips has added to the woes of Intel.

Is it so easy to venture in the chip manufacturing business segment?

Even with all the positive elements like the abundance of liquid cash reserves, high tech personnel and large production sites, manufacturing electronic chips is a daunting task. To build everything from scratch and relying on the nascent infrastructure to (smoothly) contribute to the component supply chain of electronic devices is not a smart move.

This thought led Apple to acquire Dialog (electronic chip manufacturer). By acquiring chip manufacturers, Apple gets the production infrastructure. All it needs then is to execute a well crafted “change management” program to ensure optimal production and smooth business operations.

Reuters (11 October 2018) reported:

“Apple Inc has agreed to buy a portion of chip supplier Dialog Semiconductor Plc’s business in a $600 million deal”.

Apple uses Dialog power management chips to manage iPhone’s battery life.

Structure of the business acquisition deal

• US $300 million cash payment for the Dialog engineers and offices.

• Remaining US $300 million as pre-payment to Dialog for supplying chips over the next three years to Apple.

• Apple is buying about 16 percent of Dialog’s workforce. These employees would stay in Europe and would report to Johny Srouji, Apple’s Senior Vice President of hardware technologies (who oversees Apple’s chip design segment).

Commenting on this acquisition, Dialog CEO Jalal Bagherli said:

“This transaction reaffirms our long-standing relationship with Apple, and demonstrates the value of the strong business and technologies we have built at Dialog.”

Dialog also said it would continue to deliver chips to other customers, focusing on the automotive and internet-of-things markets.

From Apple’s side, Srouji said:

“Dialog has deep expertise in chip development, and we are thrilled to have this talented group of engineers who’ve long supported our products now working directly for Apple. Our relationship with Dialog goes all the way back to the early iPhones, and we look forward to continuing this long-standing relationship with them.”

The transaction is expected to close in the first half of 2019, subject to customary closings and regulatory approvals.

Future for Apple’s in-house chip manufacturing strategy

To this date, there has been no upsetting news relating to chips being manufactured by or under the direct control of Apple. This deal will give Apple four chip design centres (Livorno in Italy, Swindon in the UK, and Nabern and Neuaubing in Germany). Apple already has chip design centres in Munich, Germany and St Albans, UK.

Apple’s foray in chip manufacturing is a calculated business decision. In the long term, this strategy has the potential to work out in favour of Apple.