Apple aims for more control, less cost as it accelerates in chip design

Wed Apr 5, 2017 2:18pm EDT
 
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By Stephen Nellis

SAN FRANCISCO (Reuters) - Apple Inc's (AAPL.O: Quote) decision to stop licensing graphics chips from Imagination Technologies Group Plc (IMG.L: Quote) is the clearest example yet of the iPhone maker's determination to take greater control of the core technologies in its products - both to guard its hefty margins and to position it for future innovations, especially in so-called augmented reality.

The strategy, analysts say, has already reduced Apple's dependence on critical outside suppliers like ARM Holdings Plc, now owned by SoftBank Group Corp (9984.T: Quote). Apple once relied heavily on ARM to design the main processor for the iPhone, but it now licenses only the basic ARM architecture and designs most of the chip itself.

More recently, when Apple bought the headphone company Beats Electronics, part of a $3 billion deal in 2014, it ripped out the existing, off-the-shelf communications chips and replaced them with its own custom-designed W1 Bluetooth chip.

"Apple clearly got rid of all the conventional suppliers and replaced about five chips with one," said Jim Morrison, vice president of TechInsights, a firm that examines the chips inside electronics devices.

"Today we do much more in-house development of fundamental technologies than we used to," Apple Chief Financial Officer Luca Maestri said at a February conference. "Think of the work we do on processors or sensors. We can push the envelope on innovation. We have better control over timing, over cost and over quality."

Most vendors of consumer electronics products rely on outside suppliers for chip design and development, primarily because it is extremely expensive. That has created huge opportunities for companies like ARM, Qualcomm Inc (QCOM.O: Quote) and Nvidia Corp (NVDA.O: Quote), which have developed core technologies for processing, communications and graphics that are used by scores of vendors.

Now, though, Apple is so big that it can economically create its own designs, or license small pieces of others' work and build on it. As with ARM and Qualcomm, the actual manufacturing of the chips is still contracted out to a semiconductor foundry, such as those run by Samsung Electronics (005930.KS: Quote) and Taiwan Semiconductor Manufacturing Co Ltd (2330.TW: Quote).

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FILE PHOTO: The Apple Inc. store is seen in Los Angeles, California, U.S., September 16, 2016. REUTERS/Lucy Nicholson/File Photo