Apple CEO Tim Cook said the company would begin jettisoning Intel processors from its Mac computers later this year as the tech giant moves away from outsourcing.
Photo: Brooks Kraft/Associated PressApple Inc. built its gadget empire by outsourcing production to a vast ecosystem of chip makers and other component specialists. Under Chief Executive Tim Cook, it is taking a lot of that business back.
The company, which released its first iPhone processor in 2010, said Monday it plans to ship Macs later this year with custom chips, a move that ends a 15-year technology partnership with Intel Corp. Apple said the custom-designed chips are more efficient and offer higher-performance graphics.
The plan fits into Apple’s broader strategy of replacing many third-party parts with components designed in house. The technology giant’s built-for-purpose parts now account for about 42% of the costs of core iPhone components, according to Wayne Lam, an independent technology analyst, up from 8% less than five years ago.
Custom components have cut costs, boosted performance and increased Apple’s control over future releases. The new Mac processors will shave $75 to $150 off the cost of building a computer, estimate analysts, who say Apple can pass those savings on to customers and shareholders.
The strategy springs from Apple’s philosophy—fostered by its late co-founder Steve Jobs—that owning core technologies provides a competitive edge. Customized chips and sensors can help its iPhone, iPads and Macs leapfrog rivals in battery performance and features. It also can protect Apple from Chinese rivals that buy universally available parts.
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Apple relied on third-party components for years while it built the engineering depth and expertise it needed to design more components itself, said former employees. As it did so, it pushed its suppliers to incorporate custom features into the parts they were providing Apple. It also needed a reliable chip foundry to make its chips. It found such a partner in Taiwan Semiconductor Manufacturing Co. over the past decade by having the supplier make its iPhone chips as demand for smartphones soared.
Apple’s decade-old push to design its own silicon chips has roiled the semiconductor industry. Intel stands to lose about $2 billion in laptop chip sales annually, or 2% to 4% of total revenue. The shares of other chip makers have sunk in recent years as Apple has broadened the number of chips it designs, forcing some suppliers to sell or exit businesses.
It is part of the industry’s natural progression in pursuit of greater performance, said Carver Mead, an engineering professor at the California Institute of Technology and former board member with Audience Inc., a former Apple supplier. But he said the repercussions have been harsh for Apple suppliers.
Many continue to supply Apple, which provides substantial revenue, even as they fear Apple will start making the very components they provide it. “Everyone knows it could happen, so it’s a conscious decision: Are you going to do this dance with the devil or say no?” Mr. Mead said.
Apple declined to comment.
The initiative—called insourcing by some suppliers and analysts—can give Apple a two-year jump on competitors in device performance because Apple can plan how multiple chips work together to limit power consumption and free up space inside iPhones and iPads for other components, analysts said.
It also reduces potential leaks of its product plans.
Apple’s chip division has mushroomed over the past decade to thousands of engineers, including the hundreds it brought on by acquiring Raycer Graphics in 1999 and P.A. Semi in 2008. Its success in designing custom chips over the past decade has cemented Johny Srouji, head of hardware technologies, as one of the most important members of Apple’s executive team. He dictates years ahead of time the features in Apple’s chips that power future devices.
Apple can justify the engineering costs of custom chips because of the savings created by eliminating one link in its supply chain, analysts say. Rather than pay a chip designer that hires a fabricator, Apple can directly pay the fabricator, as it will begin doing for Macs.
To power its appetite for more custom chips, suppliers said Apple has set up offices and poached engineers from modem provider Qualcomm Inc. in San Diego as well as modem and processor supplier Intel in Portland, Ore.
In other cases, Apple revealed plans to develop its own chip, sending shares tumbling as much as 70% for Imagination Technologies, which later put itself up for sale. A similar push to make its own power-management technologies led supplier Dialog Semiconductor PLC to sell off that business to Apple rather than compete.
Apple has acquired more than a half-dozen semiconductor companies over the past decade, including a $1 billion deal last year for Intel’s modem business. The deals were part of a surge in mergers and acquisitions world-wide, which have doubled to 410 transactions annually since the iPhone’s introduction in 2007, according to Dealogic.
Changing central processing units, CPUs, for the Mac puts new burdens on software developers, requiring many of them to update their apps so that they can work on Apple’s Arm-based chips.
Apple failed on Monday to show developers that extra work would be worthwhile because it didn’t offer any technical details about performance relative to other processors, said Patrick Moorhead, president of Moor Insights & Strategy, and a former executive at chip maker AMD.
“We know Apple will profit from lower costs, but before developers lift a finger, they should ask what they get from making investments to change their code,” said Mr. Moorhead, whose clients include Apple chip suppliers such as Qualcomm and Intel.
Apple revealed its plans at the outset of its annual developers conference and emphasized the tools it is providing developers to update their software. In the past, it has provided product benchmarks after shipping products with new processors.
Inside Apple, the march toward independence from suppliers has raised concerns. During discussions to acquire Intel’s modem business in 2019, some engineers opposed the deal, arguing that the modem inside iPhones had to meet wireless standards and couldn’t be customized in a way that benefited its products, people familiar with the debate said.
Similar debates have arisen as Apple plans to develop custom sensors for cameras, which some engineers believe offer improvements that can instead be achieved through software developments, these people said.
Such tensions are natural as a new strategy emerges, former employees and analysts said. But they added that the trade-off is worth it because of the control Apple gains over future products.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
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