Yesterday I wrote about this topic from the INTC point of view.  My main thought:  INTC is an attractive stock to own whether the answer to this question is yes or no, so you don’t need to figure this out to be a holder of the stock.  Having AAPL as a foundry customer would be a useful vote of confidence in INTC process technology, but it’s not necessary.

For AAPL, the answer isn’t so easy.

If we turn back the clock to the beginning of the year, AAPL was buying the processors for all of its Macs from INTC and having the ARMH-based chips it designs itself made by Samsung.  Why the split?

the semiconductor “arms race”

In simple terms (which is the best I can ever do), ten years or more ago the high cost of owning a fab forced the semiconductor makers to morph from integrated design/manufacturing firms to the current situation, where a large number of companies design chips and another, smaller and very capital-intensive, set makes them.  The design firms generally customize templates created by ARMH.

ARMH-based chips tend to be highly flexible and to consume little electricity.  But they lack raw processing power.   INTC, one of the few companies big enough to follow the older integrated model, makes chips that have immense processing power but aren’t very customizable and use a lot of electricity.  Mobile devices use ARMH chips.  PCs and servers use INTC chips.

ARMH is trying as hard as it can to boost the processing power of its offerings, so they can displace INTC chips in PCs.  The light bulb finally went on at INTC a few years ago that much of its market had changed and th customers no longer were lining up to buy the latest chip INTC engineers chose to fabricate.   INTC is now racing to make chips that customers wnat–that is, ones that are more flexible and use less power.

APPL’s situation

Mac:  Until 2005, IBM made the logic chips AAPL used in its Macs.  But this was, for IBM, a low-profit business that the company wanted to deemphasize.  As a result, IBM was unable/unwilling to produce the volumes AAPL needed.  INTC chips were better, and were readily available.  AAPL switched.

iPad/iPhone:  Several years ago, AAPL started an in-house effort to design ARMH-based chips to use in its smartphones and tablets.  It selected Samsung, another integrated firm and a competitor in the phone/tablet market, as its foundry.

Samsung trouble

But AAPL is now suing Samsung for copying its smartphone and tablet designs.  And, according to the EETimes, APPL is also beginning to shift its foundry business away from its Asian rival–presumably because of this.

Where should AAPL go?

One possibility is a foundry like TSMC, UMC or Globalfoundries (the combination of AMD’s former manufacturing + Chartered Semiconductor).  Another is INTC.

why INTC?

With either “pure” foundries or with INTC, APPL’s intellectual property will be equally safe.

The foundries would presumably be lower cost.  Also, they all have, to different degrees, databases of intellectual property that APPL could use.

On the other hand, INTC has a one-two year lead in process technology.  This means a chip design it produces for AAPL today on its machines would be smaller, faster and use less electricity than the same design made by a foundry.

TSMC is the safe choice

The safe choice for AAPL would be to go with TSMC.  It’s also the option that opens AAPL to the least second-guessing.  The main distinguishing features of the iPhone or iPad using TSMC chips would be the aesthetics of the device’s appearance, the app store and the status value of the Apple brand.

Also, if INTC is the permanent invalid that the stock price suggests, by selecting TSMC AAPL may dodge any future trouble that a weakened INTC may generate (what that might be, I have no idea–the worry would be that something would adversely affect the quality of foundry output).

the risk

On the other hand, it’s possible that some other tablet/smartphone maker–Asus, Acer, even Nokia–might link up with INTC instead.  If the INTC process technology works as claimed, then non-Apple devices would start to appear that process data faster and have longer battery lives than AAPL’s.  The “cool” factor might then start to pack up and leave Cupertino for Finland or Taiwan.

It will be interesting to see which choice AAPL makes.