How a rumored tie-up with Apple could save Intel—and put Apple years ahead of the competition

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It appears that Intel could be on deck to manufacture the heart and soul of Apple’s mobile devices—the custom-designed A7 microprocessor that will drive the next generation of iPhones and iPads. And if the rumors are true—the source is an unnamed institutional investor—it could put both companies far ahead of competitors like Samsung and Qualcomm.

Presently, the primary brains of Apple’s mobile devices are built by Samsung in a chip fab in Austin, Texas. (Later those chips are shipped to mainland China, where the iDevices are assembled, mainly in Foxconn’s factories.) But as Apple’s lawsuits against Samsung drag on, Apple has sought to diversify its suppliers, starting with a rumored move from Samsung to competing chip fabricator Taiwan Semiconductor Manufacturing Company (TSMC). The updated rumor is that 50% of Apple’s chips will still be made by Samsung, 40% by TSMC and 10% by Intel.

Ten percent might not sound like a lot, but a move to Intel would be huge for three reasons:

1. Apple is the only high-end mobile manufacturer that designs its own chips

Most chips in smartphones and tablets are based on designs by ARM Holdings in Cambridge, England. This intellectual property, and some software to manipulate it, is the only thing ARM makes. Its designs are licensed to hundreds of manufacturers of microchips, including Qualcomm and Samsung, which is why ARM is having one blockbuster quarter after another.

But as of the A6 chip in the iPhone 5, Apple’s chips have been entirely custom-designed by a team at Apple. They still speak almost the same language as traditional ARM-based chips, but their guts have been rejigged from the ground up—presumably for speed. This means Apple is currently the only maker of high-end mobile devices that is completely custom-designing its own chips. It’s an advantage not often appreciated by analysts and pundits, but the fact is that Apple isn’t just strong in product and software design; the company is also, thanks to acquisitions and a campaign started by Steve Jobs himself, strong in technology in a way that not even Samsung can match—unless the company starts designing its own chips too.

2. Apple has what Intel needs: Demand

While Intel has occasionally rented out its fabs for contract manufacturing in the past, it’s not in the habit of building other people’s microchips—only its own. This comes down to both pride and economics. However, as demand for PCs drops, Intel needs to keep its chip fabs busy, since each can cost billions of dollars and they’re only profitable if they’re running at full capacity. What better way to do that than to lock up a long-term contract with a customer with huge demand? The ascendance of Android notwithstanding, Apple remains by far the single highest-volume maker of smartphones or tablets.

3. Intel has what no one else can offer: A two-year lead in chip manufacturing technology

Intel has already made the leap to a whole new chip “process,” which just means that features on the microchips it makes are smaller and therefore faster than ever—between 22% and 65% faster than the chips currently being used by Apple, even without a redesign of the chip itself.

This is why it makes sense that Apple might give Intel a minority of its chip business for the A7 processor—it could simply be a test run. Manufacturing microchips is so difficult that designers often have to work hand-in-glove with the owners of chip fabs to get a product that’s up to par. Intel’s great competitive advantage in making PC chips has always been that it kept its designers and chip-builders in the same country. But once Apple’s engineers are familiar with Intel’s fabs, it’s not inconceivable that Apple could move from relying on a mix of suppliers, as it is now doing with the A7 chip, to relying solely on Intel. For years, Apple was monogamous in chip manufacture with Samsung; if Intel is the only company that can make chips at the next smallest “process,” an exclusive partnership with it might make sense.

If Apple does team up with Intel, future custom-designed Apple microchips could be not just months but years ahead of competing processors designed by ARM and produced by Qualcomm and Samsung. And all because Apple, a company known for keeping its design and manufacturing in separate countries, got together with Intel, a company known for keeping them together.

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