What is Apple's Smartphone Technology Component Strategy?

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3Q 2018 | IN-5177

Known for modifying its supplier strategy, Apple may be making changes in the near term to its suppliers of modem chips, displays, and even components related to RFFE, as the company looks to migrate its devices to 5G and OLED.

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The Changing Shape of Apple’s Strategy

NEWS


Apple is well-known for sourcing its components from at least two suppliers or changing its main supplier over time, with the goal of reducing risk and increasing negotiation ability. Recently, the company announced to its suppliers that there will be a 20% drop in orders for iPhone parts, despite the fact that three new models will be added to its list later this year. The company also recently lowered its Power Management Integrated Circuit (PMIC) order numbers with Dialog Semiconductor by 30%. There are a number of explanations for this drop: Apple could be being conservative regarding the number of iPhones it expects to sell throughout the year or it could be looking to take some of this technology production in-house.

The company has been known to modify its supplier strategy, changing which companies supply the parts over time. Most recently, Apple is moving its alliance for iPhone modem chips from Qualcomm, which has provided the chips for iPhones since 2011, to Intel, with the latter set to supply 70% of modem chips to Apple’s new smartphones. This change is due, in part, to increasing issues between Apple and Qualcomm from an ongoing legal dispute over patent licensing fees. Qualcomm recently received a boost in this legal dispute, with representatives of the International Trade Commission backing its claim that Apple infringed upon at least one patent by using Intel’s components. If this dispute is resolved, it is still unlikely that Apple will go back to Qualcomm, as it is looking to rely further on Intel for more components, possibly leading to a future acquisition. Apple plans to remove Qualcomm chips completely if Intel successfully delivers 70% of Apple’s modem chips; however, if Intel under-delivers, it is likely that Apple will turn to Qualcomm to make up the difference—how likely this will be is unknown due to Qualcomm’s efforts to ban Apple iPhones with Intel chips in the United States due to the patent infringements, which is increasing the conflict between the two companies.

Aside from changes to modem supply, Apple is also considering its options for display suppliers after it recently announced interest in providing an all-Organic Light-Emitting Display (OLED) line-up for its iPhones by 2019, moving away from its usual Liquid Crystal Display (LCD) screens. There are only a few supplier options for OLED screens, most notably Samsung Display (which has 95% of the market share in smartphone displays) and LG Display. The former is currently Apple’s sole provider of OLED displays, but the company is keen to use multiple suppliers and could turn to LG Display. However, Apple would need to work closely with LG to ensure that it can produce the required quantities, while also taking control of its hardware quality. This may be short lived, however, as OLED is likely to be replaced by microLED in smartphones within the next 2 to 3 years, and Apple has already begun its own in-house development.

Apple’s Component Updates

IMPACT


The main components that Apple is looking to update relate to Radio Frequency Front End (RFFE), which will continue to increase in complexity as smartphones move from 4G to 5G. Currently, the company procures the separate components and assembles them together before adding to an iPhone; however, integrating 5G will be far more complex. In this instance, Apple will likely opt for one of two options: delegate the design of the Radio Frequency (RF) platform to a company with the required knowledge or acquire the expertise and knowledge of RFFE (either by acquiring a component supplier to create the design or continue with the procurement and create the design itself). Delegating to or acquiring a company are the most likely options, as putting these growing numbers of separate components together is becoming more complex.

If Apple does go down this route, it is likely that it will acquire a company like Qorvo, allowing the components to then be designed, made, and assembled in-house, ensuring that they are designed specifically for the individual models. This move could be beneficial for companies like Qualcomm, as it is likely that Qorvo’s current clients would have to look elsewhere after an acquisition. Other potential companies for acquisition include Skyworks (which is currently not as aggressive in the market as Qorvo), Avago, and Murata.

As Apple is increasingly moving the supply of its modems from Qualcomm to Intel, this could suggest that an acquisition is imminent, which, if it occurs, may allow Intel to provide an increasing number of components. It is also worth noting that Apple, unlike some other smartphone vendors, does not have an integrated modem and application processor platform; it only owns the application processor, not the modem. Indeed, Apple is currently the only major smartphone vendor that has modem-only supply for its devices. This could further the likelihood of Apple acquiring Intel’s modem business for smartphones and could help increase the number of components that Apple makes in-house, allowing it to own a modem and have Intel as its exclusive provider, which it virtually is anyway in the smartphone market. This acquisition would help reduce the amount of time for Apple to transfer over to 5G, as Intel is doing well in that area.

Which Apple Suppliers Will Remain in the Future?

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Apple’s changing supplier strategy has often had an adverse effect on those companies, as any contract held with Apple can become a large source of revenue for a supplier. Notably, in 2017 the company dropped Imagination Technologies as a supplier of mobile graphics components (Apple was its biggest supplier), instead moving its development in-house, resulting in the A11 Bionic chip in the iPhone 8 and iPhone X. Imagination’s stock price halved overnight and 6 months after this move, Imagination agreed to sell itself to Canyon Bridge, a Silicon Valley private equity firm backed by Chinese fund Yitai Capital for US$743.2 million.

Apple’s expected 20% drop in component orders, as well as the probable move to Intel from Qualcomm, and the drop in PMIC orders from Dialog Semiconductors, as mentioned above, (which will likely see a drop in revenue to which Apple contributed 77% in 2017), indicate that may companies in the supply chain will again have to deal with this change. They will need to either form new partnerships, make acquisitions, or go looking for new clients. For example, if Apple does go down the route of acquiring a company like Qorvo, this could be beneficial for companies like Qualcomm, as it is likely that Qorvo’s current clients would have to look elsewhere for components after the acquisition.Other companies that supply components to Apple that may be affected by a change in Apple’s supply strategy include TSMC (Apple is one of TSMCs largest mobile chip customers and could lose out if the supply strategy changes), Samsung (Apple could be moving from Samsung to LG for OLED), LG Display (could be affected by the change to OLED and MicroLED), Japan Display (could be affected by the change to OLED and MicroLED), Cirrus Logic (share price fell after Apple announced a drop in component orders), Skyworks (share price fell after Apple announced a drop in component orders), Avago (could be a potential acquisition for Apple), and Murata (could be a potential acquisition for Apple).

It is still not known exactly what the reason is for Apple’s drop in component orders (e.g., the company being conservative about iPhone shipment numbers or taking the design in-house); however, the fact that the company is looking to update a large number of its components, including moving to 5G and OLED and that it has begun to switch from Qualcomm to Intel suggests that an acquisition is imminent. On top of this, Apple has been gradually bringing more of its design in-house, thanks to previous acquisitions of companies like mobile processor company P.A. Semi and Intrinsity, flash controller company Anobit, and fingerprint security company AuthenTec, which have helped with this effort. It is more than likely that Apple will look to acquire more companies, such as Intel’s modem business for smartphones or Qorvo, to help increase the number of components that are designed and built in-house. Apple is looking to bring its components in-house in order to help control the supply chain to ensure that the parts are built as required and to control the cost of the parts that are built. If the company acquires a modem business and an RF business, and makes its own MicroLED, there are very few parts left to outsource; in the iPhone X, Qualcomm and Intel supplied the modems, NXP supplied the NFC chip, Toshiba supplied the flash storage, Cirrus supplied the audio components, and Skyworks, Cirrus, Texas Instruments, and STMicroelectronics supplied other components.

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