Apple is Moving to Custom Silicon

 

 

 

 

 

Apple is Moving to Custom Silicon

 

Kulbhushan Bhatt

Penn State University

MGMT871: Strategic Management

Eric Stein

November 16, 2020

 

Apple is Moving to Custom Silicon

            Apple announced earlier this year that it will use in-house silicon to power the new Macs (Iyengar, 2020). Apple claims that these devices will be up to 3x faster than the previous models and provide a longer battery life! Most PCs are today powered by x86 (X86 2020) chips. The new M1 chip is based on ARM architecture (ARM architecture 2020) which is the dominant architecture for processors used in smart phones. This move enhances competitive advantage of Apple in the hyper-competitive PC market. This paper analyzes the impact of this strategic move under the framework of Core Competency Strategy to assess impact on Apple and the PC market.

Apple and PC Market

Apple, one of most admired brands in world, is currently best known for iPhone. It also designs, manufactures and markets personal computers, tablets, wearables (earphones, smart watches, etc.). Apple’s products are highly differentiated due to stylish design, and User Experience (UX) and dominate the high-end segment. Its line of PCs is trademarked Mac.

In its 2020 10K, Apple reports that Macs made $28.6 billion (10.4%) of its annual revenues (see Table 1 in appendix). While Mac and iPad grew at 11% in last fiscal year, the iPhone sales shrunk by 3%. Apple has 7% share of worldwide PC shipments (Gartner 2020).

Move - Apple Silicon

            Apple, along with other top 5 manufactures of PCs, owns 83% of PC shipments (see Table 2 in appendix). Most PCs use x86 processors manufactured by Intel and AMD.

Apple provides both hardware and software (MacOS and various popular apps), unlike other manufactures who use Microsoft Windows OS. It allows it to fully control design and integrated experience. Apple Macs integrate well with other Apple devices and services like iPhones, iCloud, etc. thus building a moat around its products. 

Apple has been using ARM based in-house designed custom chips for its iPhones and iPads for years (Ritchie, 2020). These chips are system-on-chip, i.e., they include processor, graphics and RAM, and have lower power requirements.  Apple announced three Mac devices (MacBook Air, MacBook Pro, and Mac mini) that will use its in-house designed ARM based chip named M1. Apple claims that these devices will be 3x faster and have longer battery life (See Figure 1 in Appendix). The additional benefit is the ability to run iPhone and iPad apps on Macs. The chips also include a Neural Engine that provides Machine learning and AI capabilities.

Competitive Strategy

This is the culmination of strategy that was in work for over a decade in order to acquire resources, develop capabilities, and develop core competencies that provide strategic advantage. Apple realized within months of launch of iPhone that it could not rely on Intel to provide mobile friendly chips to properly balance performance and energy efficiency (Phan, 2020). In 2008, Apple bought P.A. Semi to secure the talent and IP to design and develop ARM based in-house chips according to Apple’s requirement of features, performance and power balance for iPhone and iPad (Thompson, 2020). The M1 is based on same design that is used for chips designed for iPhone and iPad. The strategic competitive advantage of in-house silicon is:

·         Faster development cycle: not dependent on external vendors for desired features

·         Greater margins: Captures greater value by backward integration (Phan, 2020).  Lower BOM across the Mac line.  Reduces variable cost(c) in fundamental business equation, boosting profits. It enables it to control price(p).

PROFITS = (p*q) – (c*q) – Fixed  Costs

·         Control: Tighter hardware and software integration (Phan, 2020). Increased control over technology roadmap and scaling of production.

 

There are four criteria for sustainable competitive advantage – valuable, rare, costly to imitate, and non-substitutable (Hanson, Hitt, Ireland, & Hoskisson, 2017). This strategy meets all of them. Although Microsoft has released its Surface tablet with ARM processor developed by Qualcomm, it cannot achieve the same strategic benefits unless Microsoft and Qualcomm form a strategic partnership and tightly integrate their development processes (Ritchie, 2020). This is a negative development for Intel and AMD (i.e., potential loss of ~7% of processor market). Apple is likely to increase its moat on PC market and increase its share of PC market at the cost of other manufacturers.

Conclusion

Apple has attained sustainable competitive advantage in PC market by vertical integration. Considering the long period required to build such competency by acquiring or developing resources and capabilities, it is expected to last for years.

 

References

ARM architecture. (2020, November 13). Retrieved November 14, 2020, from https://en.wikipedia.org/wiki/ARM_architecture

Gartner Says Worldwide PC Shipments Grew 2.3% in 4Q19 and 0.6% for the Year. (2020, January 13). Retrieved November 15, 2020, from https://www.gartner.com/en/newsroom/press-releases/2020-01-13-gartner-says-worldwide-pc-shipments-grew-2-point-3-percent-in-4q19-and-point-6-percent-for-the-year

Hanson, D., Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management: Competitiveness & globalisation. South Melbourne, Victoria: Cengage Learning.

Iyengar, R. (2020, November 10). Apple details new MacBook Air, MacBook Pro and Mac Mini -- all powered by in-house silicon chips. Retrieved November 15, 2020, from https://www.cnn.com/2020/11/10/tech/apple-silicon-chips-mac/index.html

Phan, T. (2020, November 10). How Apple built its own chip empire and gave Intel the boot. Retrieved November 15, 2020, from https://thehustle.co/11102020-apple-chip/

Ritchie, R. (2020, July 20). Rene Ritchie: Why Apple Silicon is not ARM. Retrieved November 15, 2020, from https://www.imore.com/mac-moving-apple-silicon-not-arm

Thompson, A. (2020, September 15). Nvidia's Integration Dreams. Retrieved November 15, 2020, from https://stratechery.com/2020/nvidias-integration-dreams/?utm_source=Memberful

X86. (2020, November 08). Retrieved November 14, 2020, from https://en.wikipedia.org/wiki/X86

 

 

Appendix

Figure 1: Mac Line based on M1 (image via Apple)

 

Table 1: Apple Product and Services Performance from Apple, Inc. 2020 10-K form

Table 2: Preliminary Worldwide PC Vendor Unit Shipment Estimates for 2019 (Thousands of Units) (Gartner 2020).

 

Company	2019 Shipments	2019 Market Share (%)	2018 Shipments	2018 Market Share (%)	2019-2018 Growth (%)
Lenovo	62,968	24.1%	58,257	22.4	8.1%
HP Inc.	57,922	22.2%	56,252	21.7	3.0%
Dell	43,956	16.8%	41,790	16.1	5.2%
Apple	18,350	7.0%	18,522	7.1	-0.9%
Acer Group	14,762	5.7%	15,729	6.1	-6.1%
ASUS	14,476	5.5%	15,425	5.9	-6.2%
Others	48,804	18.7%	53,788	20.7	0.6%
Total	261,237	100.0	259,763	100.0	0.6