Tuesday, January 10, 2023

Apple intends to utilise its own design instead of a crucial Broadcom chip


The actions will further disrupt a chip industry that supplies Apple with components that bring in billions of dollars. Apple Inc.'s push to replace the chips inside its devices with homegrown components will include dropping a key Broadcom Inc. part in 2025, according to people familiar with the situation, dealing a blow to one of its biggest suppliers. The world's most valuable technology company has already removed the majority of Intel Corp.

According to the individuals, who requested anonymity because the plans are private, Apple also intends to prepare its first cellular modem chip by the end of 2024 or early 2025 as part of the shift. This will enable Apple to replace electronics manufactured by Qualcomm Inc. Apple was initially anticipated to replace the Qualcomm component this year; however, delays in development have pushed back the timeline.

In the most recent fiscal year, Apple accounted for approximately 20% of the chipmaker's revenue, or nearly $7 billion. Apple is the company's largest customer. Despite the fact that the iPhone maker has warned for years that its reliance on Apple will diminish, Qualcomm received 22% of its annual sales from the company, which amounts to nearly $10 billion.

On the news, Broadcom shares dropped as much as 4.7% before recovering. The shares fell 2% to close at $576.89. Before reaching $114.61, down 0.6 percent, Qualcomm's stock dropped as much as 1.6%. Apple gained $130.15, or 0.4%.

The actions will further disrupt a chip industry that supplies Apple with components that bring in billions of dollars. The world's most valuable technology company has already switched to using Apple Silicon in-house chips rather than the majority of Intel Corp. processors in its Mac computers. The biggest manufacturers of wireless electronics are now being affected by the changes.

More than half of Apple's $394.3 billion in revenue was generated by the iPhone, which is the company's most profitable product. During earnings calls, Broadcom refers to Apple as its "large North American customer," and the phone has also contributed to the company's expansion. On Apple devices, the chipmaker produces a combined component that handles both Bluetooth and Wi-Fi functions.

According to the individuals, Apple is working on its own chip replacement and intends to begin using it in its devices in 2025. Additionally, it is currently developing a follow-up version that will incorporate Bluetooth, Wi-Fi, and cellular modem capabilities into a single component.

Apple's representative declined to provide any additional information. Broadcom did not immediately respond.

Apple continues to receive radio-frequency chips and wireless charging controllers from Broadcom, but the company has also been working on customizing those components.

Hock Tan, CEO of Broadcom, expressed optimism during a conference call last month that his company will maintain its position at Apple.

He stated, "We believe we have the best technology and provide value to our customers." There is no need to look for another position where you are not the best.

Beyond citing the company's previous statements on the subject, Qualcomm declined to comment.

The chipmaker said in November that it would provide the majority of modems for the iPhone launch in 2023, up from the previous assumption of just 20%. Beyond this, "we are assuming minimal contribution from Apple product revenues in fiscal '25, and there are no changes to our planning assumption," Qualcomm stated.

Apple intends to initially only use its own component in one new product, such as a high-end iPhone model, as it moves away from Qualcomm modems. Following that, it will gradually transition away from Qualcomm modems, which it anticipates will take approximately three years, just as it has done with previous transitions.

However, the switch has not yet been simple. The company set a goal of releasing its own cellular modem by this year but ran into issues with battery life, overheating, and getting the component validated. The iPhone is currently compatible with over 100 wireless carriers in over 175 nations, necessitating a lengthy and time-consuming testing process.

The most important component of the iPhone for most people is a cellular modem, which enables the phone to take phone calls and connect to the internet when the device is not connected to Wi-Fi. It could significantly disadvantage Apple's flagship product if the company's offering is inferior to Qualcomm's component.

Apple’s biggest source of revenue is the iPhone, which sold for more than $200 billion in the most recent fiscal year. The prolonged transition could also put Apple in a difficult position. As the component in various devices is replaced, the company will continue to rely on Qualcomm for several years.

Around the year 2018, Apple opened an office in San Diego near Qualcomm's headquarters to begin working on its modem. The company opened additional offices in key areas known for the development of wireless technology and purchased Intel's modem unit in 2019 for $1 billion to accelerate development.

Since the Bluetooth and Wi-Fi chip project is newer, its release will take longer. However, Apple has previously produced some wireless chips, such as the AirPods' H2 processor and Apple Watches' W3 chip.

Until a 2019 settlement, Apple and Qualcomm were locked in a legal battle over modem patents and royalties. Apple deemed the truce necessary at the time in order to introduce 5G support to the iPhone in 2020. Qualcomm agreed to continue supplying Apple with components until 2024.

Broadcom and Apple have also had rocky relationships. During the supply crunch caused by the pandemic, Tan, the CEO of the chipmaker, who has a reputation for being a tough negotiator, made some customers commit to orders that cannot be cancelled.

Apple said in 2020 that it would spend $15 billion on Broadcom chips in a deal that would last until the middle of 2023. However, despite the fact that Apple is Broadcom's most important client, Tan's dedication to the market has occasionally wavered. Tan indicated that Broadcom might sell the chip supplier to Apple prior to the 2020 agreement.

Wells Fargo & Co. analyst Aaron Rakers stated in a report that Apple's next steps are another thing for Broadcom investors to worry about.

He stated, "While it is well-known that Apple continues to move toward internally designing an increasing number of its components, this likely creates a headwind for investor sentiment given how significant Apple’s revenue contribution is from a Broadcom perspective."

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