'ARMed' Apple May Threaten Intel PC Dominance

If Apple Inc. (Nasdaq: AAPL) abandons the Intel x86 architecture in its Mac personal computers in favor of chips based on ARM technology, the shift will have significant implications for both companies' supply chains and may further complicate Intel's business strategy as it copes with slowing PC sales.

News of Apple's intentions came last week in a Bloomberg article, in which two unnamed sources confirmed that Apple is seeking to outfit its Macs with a version of the chip technology it uses in its iPhones and iPads. The sources also said that, in the foreseeable future, the chips used in Apple's mobile devices will be powerful enough for its desktops and laptops.

As handheld devices increasingly function like PCs, the engineers working on this project within Apple envision machines that use a common chip design. If Apple Chief Executive Officer Tim Cook wants to offer the consumer of 2017 and beyond a seamless experience on laptops, phones, tablets and televisions, it will be easier to build if all the devices have a consistent underlying chip architecture, according to one of the people.

Matt Davis, a supply chain analyst at Gartner, told me his first reaction to the article was that "this either has really big supply chain implications, or it's just posturing right now between two of the big guys, and nothing will actually happen." He stressed that any transition to ARM technology would be several years away, and that Apple is pressuring Intel right now to let it know that its focus on the processor market will be "very closely aligned with consumption, and perhaps that needs to be an area of investment."

It can't be lost on Intel that ARM technology is advancing. Last month, ARM Ltd. (Nasdaq: ARMHY; London: ARM), a British chip developer that licenses designs and supporting technology to companies like Qualcomm Inc. (Nasdaq: QCOM), unveiled its first 64-bit processor for the next generation of smartphones, tablets, and servers. The 64-bit processor will give Apple an easier path to running its 64-bit OS X on ARM hardware. The chips, which are expected to ship in 2014, promise to use the same amount of energy as today's processors while offering three times more processing power.

And Apple's semiconductor focus is shifting. On Oct. 29, it announced a major shakeup and plans for a more intensive focus on the semiconductor area of its business. The company said in a press release:

Bob Mansfield will lead a new group, Technologies, which combines all of Apple's wireless teams across the company in one organization, fostering innovation in this area at an even higher level. This organization will also include the semiconductor teams, who have ambitious plans for the future.

The company also announced that it will align its software application teams more closely. Craig Federighi will head both iOS and OS X. "Apple has the most advanced mobile and desktop operating systems, and this move brings together the OS teams to make it even easier to deliver the best technology and user experience innovations to both platforms."

Apple turned to Intel in 2005, when it dropped PowerPC chips made by Motorola and IBM. During the last four years, Apple has been steadily building the semiconductor side of its business. In 2008, it bought P.A. Semi, a fabless semiconductor company that specialized in developing fast, low-powered chips. In 2010, Apple acquired Intrinsity, a privately owned ARM design firm that developed processors for mobile devices.

Craig Stice, an IHS analyst, told me that if Apple switched to ARM technology for Mac products, the MacBook Air line would probably be the first to receive the new chips. The laptops do not require as much computing power as the MacBook Pros, which have stronger video and graphics capabilities. "To incorporate ARM chips into their MacBook Pro laptops, which are business oriented and require high-performance computing capabilities, will be tricky, but Apple has a lot of technology, and they typically tend to surprise everybody."

In an interview with MIT Technology Review, ARM CEO Warrant East didn't shed any light on his views on the possibility of Apple switching to ARM architecture for Mac products. But he did say using ARM technology for PCs will take time to perfect.

Nobody's going to rewrite Lotus Notes to run on ARM. We don't believe there's going to be a massive switch to ARM-based PCs overnight. It's more of a gradual process as legacy applications become replaced by newer applications that are more up to date.

Both Davis and Stice speculated on the potential impact for Intel's supply chain. According to Stice, if an ARM-based processor developed by Apple could hit people's performance targets, other ARM core vendors might try to push for similar functionality. "If Apple can do it, can anybody else do it?" he asked. "There's some potential that the impact could be bigger, and if Apple can do this, there's an opportunity for HP or Dell to try to accomplish the same thing."

Davis sees Intel's fiscal 2011 investments, including $10.8 billion in capital investments and $8.4 billion in research and development, as a commitment to expanding its footprint, based on a capacity expectation and where it thinks demand will grow.

"Any major shift or decommitment in available demand is a pretty big impact to profitability for a company, because the manufacturing facilities are so asset intensive and expensive that you really need to make sure that it's fully being utilized in these plans, which are made years and years in advance," Davis said.