Apple announced that it would be replacing Intel microprocessors used in Mac Computers with their own chips, signaling the end of a 15-year partnership.

In a move that many in the industry predicted, Apple severed its relationship with Intel in favour of working with Taiwan Semiconductor Manufacturing to build its Mac chips going forward. The company currently builds components for iPhones and iPads. Experts familiar with the arrangement said the company is likely to copy Apple’s current arrangement with Foxconn, who assemble Apple’s iPhones.

Intel sells about $3.4 billion worth of Mac Chips to Apple, worth about 5% of Intel’s annual sales, according to C.J Muse, an Evercore Analyst speaking to the NY Times. While the blow may not hit Intel financially, the reputational impact will be severe.

Intel is the world leader in semiconductor business, pioneering the process of turning silicon wafers into chips that power computers, smartphones and consumer devices. Therefore, it was no surprise that the US Congress passed legislation earmarking tens of billions of Federal funding to bolster US research and manufacturing in semiconductors. An advantage that many in the US perceive to be under threat from China.

Apple’s move is not earth-shattering to many in the industry. For many of Apple’s rivals such as Amazon and Google already design their own chips, mainly to cater for the growing use of Artificial Intelligence and 3-D printing which requires special purpose circuitry rather than the general purpose microprocessors provided by Intel.

This high profile uncoupling comes at a troubling time for Intel. For decades, Intel’s advantage has been its ability to pack more transistors per square of silicon, boosting the computing capacity at a lower cost. More bang for your buck, you might say.

While this worked to perfection in the computing era, it is less advantageous in the smart phone era. The goal in this era is about “miniaturisation”, reducing the size transistors that work inside smart devices.  Alleged internal troubles and botched setbacks saw Intel delay their new process of making chips from 2015 to 2019. A fateful decision, as competitors such as Taiwan Semiconductors and Samsung Electronics raced ahead in producing new faster and efficient chips.

Strongest Survive

Apple’s recent moves mirror a growing trend across Silicon Valley, one of aggressive investment and vertical integration, as Silicon Valley’s giants are trying to control every aspect of production.

The investment figures are staggering; Facebook invested $5.7 billion for a 9.9% stake in Jio Platforms, a subsidiary of Reliance Industries, one of India’s largest multinational companies. At the same time, the company is building a 23,000-mile underwater fiber optic cable around Africa.

Amazon has added 175,000 new employees since March and invested in 12 Boeing 767s to its Prime Air, increasing its air cargo fleet to over 80.

It is no surprise that the likes of Apple and Amazon are investing huge amounts of R&D. Amazon, Apple, Facebook, Google and Microsoft lead Corporate R&D and are estimated to be sitting atop cash reserves of a combined value of $557 billion according to the New York Times.

There is historical precedence here too, for strong investment during a time of economic downturn leads to greater rewards in the longer term, as the NY Times article points out. In the 1990s, IBM used the recession to transition itself away from a hardware company into a software and services company. In the Dot-Com Bust in the early 2000s, Apple accelerated R&D leading to the creation of the iPod, iTunes Music Store, iPhone and iPad, kickstarting a glorious market run resulting in Apple’s $1 trillion market valuation in 2017.

Silicon Supply

While COVID-19 has forced many companies to examine their supply chains, resulting in many “reshoring” their operations away from China and elsewhere, it is not clear what the future supply chain will look like, post-COVID.

Yet, for a glimmer of that future, many supply chain observers would do well to examine and keep abreast of the supply chain revolution in Silicon Valley.