Analysis: Next Intel CEO to guide new business, maybe Apple deal

Intel's next CEO is likely to shepherd the top chipmaker into a growing contract-manufacturing business, a strategic shift that could lead to a deal with Apple Inc and give it a fighting chance to make inroads in the mobile arena.

Manufacturing chips on behalf of other companies is a major departure for Intel, which for decades has based its business on using its manufacturing prowess to offer its own PC chips superior to rival products. As PC sales contract and Intel's fabrication plants operate at less than full capacity, the chipmaker sees an opportunity to fill idle production lines while earning new revenue.

Such a move may also offer a backdoor of sorts into large-scale production of chips for mobile devices, where Intel has made little headway after underestimating the impact of the iPhone and iPad and falling behind more nimble rivals.

Intel said last week it will open up its prized manufacturing technology to make chips designed by fellow chipmaker Altera -- snagging its first sizeable customer in a contract manufacturing, or "foundry", business expected to grow.

That has spurred talk of an Apple deal. A source close to one of the companies says Intel and Apple executives have discussed the issue in the past year but no agreement has been reached.

"If you can have a strategic relationship where you're making chips for one of the largest mobile players, you should definitely consider that. And for Apple, that gets them a big advantage." said Pat Becker Jr, of Becker Capital Management, which owned about $39 million worth of Intel shares at the end of last year.

Intel's plan entails heavy capital spending, even as it struggles in its core market and has yet to find enough new demand to fill future fabrication plants. It would also mean getting into a foundry sector that, because it depends on volume to drive business, is highly vulnerable to economic swings and could compress Intel's industry-leading margins.

But it is a bet that analysts say is necessary if Intel wants to remain a top player. The company believes that taking on more contract manufacturing business will not only help fill an upcoming generation of production lines, but help pay for the cost of research to upgrade them.

After Intel upped its capital spending budget by $2 billion to $13 billion this year, speculation grew that Apple could ink a deal to use Intel's leading process technology to make better chips for its iPad and iPhone. Doing so could help Apple end its foundry relationship with Samsung, which has become a fierce competitor with its own smartphones and tablets.

Sunit Rikhi, vice president and general manager of Intel custom foundry, told Reuters last week his group is ready to take on a potential large, unidentified mobile customer, although he declined to discuss Apple specifically.

Intel spokesman Chuck Mulloy said the chipmaker is in constant discussions with Apple, which buys its PC chips, but he would not comment on negotiations about a potential foundry relationship. An Apple spokesman declined to comment.

Source:
http://www.chicagotribune.com/business/sns-rt-us-intel-foundrybre92609r-20130307,0,636950.story


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