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Apple’s Strategy behind Developing Its Semiconductor Capabilities

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Apple develops in-house semiconductor capabilities

Apple (AAPL) is well-known for exercising complete control over its hardware and software. It has long been developing chips in-house, and it recently started expanding its in-house semiconductor capabilities as it looks to tap emerging technologies that demand integrated solutions.

The semiconductor industry is consolidating as the technology shift to AI (artificial intelligence), and IoT (Internet of Things) has created demand for more optimized solutions.

Reducing reliance on suppliers

Apple (AAPL) is developing several smartphone components in-house, including graphics and Bluetooth components. Developing these chips is expensive and exposes the company to new risks faced by semiconductor companies.

However, the iPhone maker also gains an advantage in negotiating deals with suppliers as the consolidation in the semiconductor industry (SMH) creates bigger suppliers. Apple also attains gets greater control over the iPhone production process as it reduces reliance on suppliers for components.

New paradigm of integrated solutions

In general, gaining an advantage over suppliers is not sufficient motivation to make such an expensive investment. Apple’s (AAPL) main strategy behind developing semiconductor capabilities is to prepare for the paradigm shift away from commodity vendors to integrated solutions providers.

The emergence of AI and IoT has created demand for SoCs (system on chip) that deliver more functionality at low power. Apple has been developing its own SoC technology since 2010, after it acquired microprocessor startup P.A. Semi in 2008.

Apple is incorporating the functionality of discrete chips such as graphics on its A-series SoC, eliminating the need to add the discrete chips separately. This process helps the iPhone maker save space and reduce power consumption.

While this is good news for Apple, it is a risk for component suppliers like Imagination Technologies that depend on Apple for their earnings.

Personnel shifts

Apple (AAPL) has hired several designers and engineers from Dialog Semiconductor. According to a report by Business Insider, Apple hired around 28 of Dialog Semiconductor’s employees between March 2016 and November 2017.

Apple hired Qualcomm (QCOM) modem chip engineer Esin Terzioglu to head its wireless SoC project. This indicates that the handset maker could be looking to develop its modem chips.

Samsung (SSNLF) already integrates modem hardware in its in-house Exynos processor. It also manufactures its memory chips and displays in-house.

Becoming competitive in emerging technologies

Apple (AAPL) is known for developing some of the industry’s most advanced chips. Its A-series processors are competitive with Qualcomm’s Snapdragon processors used by other handset makers.

If Apple develops more chips in-house, it would have greater control over its product. As a result, it could manufacture differentiated products that can command a premium price.

Next, we’ll see how Apple’s in-house strategy is impacting semiconductor suppliers.

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