Apple Moves to Self-Produce Key Chips

Steve Jobs, left, Apple’s CEO, holds an iPhone at a recent technology show, while Samsung Electronics’ semiconductor chief Kwon Oh-hyun is seen on the right in this file photo. Apple is injecting resources toward making its own chips. The U.S. consumer electronics company has a plan to embed the internally designed application processor (AP) in its next 4G iPhone models. The strategy shift by Apple is not good news for Samsung, which supplied its APs for Apple’s 3G iPhones. / Korea Times File

Action May Pinch Chief Supplier Samsung Electronics

By Kim Yoo-chul
Staff Reporter

The situation seems negative for Samsung Electronics as one of its biggest overseas partners ― Apple ― is heavily injecting cash into its own chips.

That means the California-based consumer electronics company will use an internally designed application processor (AP) in its upcoming 4G iPhones, officials and market watchers say.

The AP is the main electronic brain for most high-end digital devices such as smartphones. The function of the non-memory chip is comparable to the CPU in PCs.

While DRAM and NAND flash memory chips are just used to read, write and store data, the AP controls the whole operating system, and also promising sustainable and steady profits regardless of volatile market situations in chips.

Samsung Electronics, the world's top vendor of memory chips but a second-tier player in the more profitable non-memory sector, has so far been supplied APs for Apple's 3G iPhones, Samsung officials say.

The upgraded iPhone is expected to make its U.S. debut by the first half of this year.

"iPhones have been using Samsung Electronics-produced APs that were partially designed by Apple engineers. But Apple has decided to use its own AP for its 4G models," a high-ranking industry executive told The Korea Times, Monday.

"That's not good news at least for Samsung Electronics' system LSI business," he said, adding the company has partially proved its technology capability in the non-memory sector by providing its APs to Apple's iconic gadgets.

Samsung's system LSI unit is handling the company's less-volatile, non-memory business. Samsung, which is aiming for $25.5 billion in total chip sales by 2012, is struggling to yield visible results in this sector.

The company is still in the "testing phase" to upgrade the prowess of its mobile APs for use in its own smartphones.

Apple's own A4 chip was confirmed to have been used for the iPad.

When contacted by the newspaper over Apple's latest decision, Kim Choon-gon, a Samsung Electronics spokesman, declined to comment citing the sensitivity of the issue. Steve Park, a representative of Apple's South Korean branch, also wasn't available.

Apple's "departure" forecast after the U.S. company bought semiconductor designer P.A. Semi Inc. for $278 million in April 2008. P.A. Semi's technology has an edge in low-power chips, which explains the iPad's 10-hour battery life, analysts say.

Not Whole Crunch

But the effect of Apple's transition towards the development and use of its own processors on Samsung Electronics is expected to be limited as Samsung is the biggest supplier of its NAND flash memory chips for most of Apple's popular consumer products.

"Apple's action to put its own processors in strategic products is a blow to Samsung's system business. Overall, however, it won't see a profit decrease in its semiconductor business due to the upbeat mood in the global chip market," Park Hyun, an analyst at Prudential Investment, said.

Samsung executives say the company will produce processors developed by Apple on a contract-based foundry service. Foundry is a manufacturing process, which has been widely adopted by chipmakers to save on the skyrocketing costs of research and development (R&D).

"It's going to be OK for Samsung in terms of revenue growth in chips. But Apple's switch means Samsung is still a long way off becoming a top-tier semiconductor company for both memory and non-memory chips," an industry watcher said.