Despite a resurgence of rumors and clues that Apple Inc. (NASDAQ:AAPL) has finally inked a chip manufacturing partnership with Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), the Mac maker could be looking into arguably its biggest move toward vertical integration yet.
SemiAccurate reported last week that Apple Inc. (NASDAQ:AAPL) has “bought into” a fab, or chip fabrication facility, in “not a trivial way.” That would allow the company to reduce its reliance on third-party manufacturers for one of the most important components in its devices. Apple had previously offered TSMC sizable investments to guarantee dedicated capacity, only for the company to politely decline in order to maintain flexibility.
AppleInsider originally thought maybe United Microelectronics Corp (ADR) (NYSE:UMC) was involved; CNET followed up and believes that the deal instead involves Apple Inc. (NASDAQ:AAPL) partnering with GlobalFoundries, potentially with a sizable investment. Apple and GlobalFoundries are supposedly testing out the latter’s new $6 billion plant in New York, and SemiAccurate still thinks that Apple is purchasing a piece of one of GlobalFoundries’ plants.
As it stands, Intel Corporation (NASDAQ:INTC) remains the only domestic chip maker that still makes its own chips, while virtually every other company has shifted toward a fabless model to reduce capital expenditures. That’s one of Intel’s key advantages, and one that Apple Inc. (NASDAQ:AAPL) could potentially enjoy if it were to make such a move.
Instead, Piper Jaffray analyst Gene Munster thinks it makes more sense for the company to focus its efforts on developing chip processes instead of owning and operating a full-fledged factory. Working on just the process technology would only cost around $2 billion, much cheaper than the $5 billion to $7 billion. By only developing the process technology, Apple Inc. (NASDAQ:AAPL) could turn around and license this process to other foundries to help cover its costs.
Munster also speculates that Apple could potentially acquire International Business Machines Corp. (NYSE:IBM)‘s process development division, which is rumored to be up for sale. Apple currently co-develops process technology with Samsung, which is partially why it’s taken so long to transition chip production away from the South Korean giant. Going it alone would further distance Apple from its biggest competitor.
Apple Inc. (NASDAQ:AAPL)’s business has become quite capital intensive recently, as expenditures have skyrocketed in recent years. That’s also led to greater depreciation expense, which has pressured gross margins. Owning a fab would add to both of those departments, but it would be worth it.
Perhaps this is what Apple was referring to when it said its new semiconductor teams “have ambitious plans for the future.”
The article Did Apple Buy Its Own Chip Plant or Not? originally appeared on Fool.com and is written by Evan Niu, CFA.
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