How Apple Disrupted the US Semiconductor Industry

American Hi-tech Manufacturing in the Post-Mobile Era

American Hi-tech Manufacturing in the Post-Mobile Era

The success of the iPhone has diminished American hi- technology manufacturing competitiveness. Nowhere is this more evident than in advanced semiconductor manufacturing. By virtue of its ubiquitous scope and scale and a highly distributed global supply-chain, the iPhone has had a profound impact on the American semiconductor manufacturing landscape and may have given Asia an insurmountable lead and momentum to win in the next wave of computing.

By not engaging with US semiconductor manufacturers, Apple enabled critical semiconductor technology innovation and manufacturing infrastructure to take root outside America, specifically in south-east Asia. The sheer volume of silicon driven by Apple’s products has given an enormous, compounded advantage to Asian semiconductor foundries. Armed with this critical know-how and a well established infrastructure, it is the Asian semiconductor manufacturers who are now poised to win the next wave of technological innovation.

Technology competitiveness aside, the economic and geopolitical implications of this shift are not only staggering, but potentially irreversible.

“Designed in Cupertino, Manufactured in Asia”

The most significant changes in the silicon foundry, fab-less and IDM (Integrated Device Manufacturer) ecosystem over the last decade can be traced back to 2007, when Steve Jobs asked then Intel CEO, Paul Otellini if Intel would be interested in becoming the primary system-on-chip (SoC) supplier for the yet to be announced iPhone. After much internal analysis, Intel declined (see quote from Paul below).

Nearly 7 years later in 2013, Paul himself acknowledged the enormous fallout of this decision when he said in an interview to The Atlantic, “the world would have been a lot different if we’d done it”.

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it. The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do. At the end of the day, there was a chip that they (Apple) were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100X what anyone thought. The lesson I took away from that was, while we like to speak with data around here, so many times in my career I’ve ended up making decisions with my gut, and I should have followed my gut. My gut told me to say yes.”

— Former Intel CEO Paul Otellini in an interview to The Atlantic, 2013 (Link)

In 2007, Apple did not have an experienced in-house silicon team that could have pulled off what was needed to design the primary computing chip for the iPhone. In just the prior year, Apple had made a landmark shift away from PowerPC (IBM/Motorola) chips to x86 (Intel) chips for its Mac line of computers. The flagship Apple product at the time was the iPod which wasn’t an advanced computing device and did not necessarily require a competitive silicon processor. The upcoming iPhone on the other hand, required not only a complex, ultra-low power, high performance computing SoC, but one which also cost a fraction of the expensive Intel CPU chip that went into the Macbook.

In 2007, Intel was the undisputed leader in semiconductor manufacturing technology, at least two generations ahead of Taiwan Semiconductor Manufacturing Corporation (TSMC). Intel also was the undisputed leader in high-performance x86 CPU chip design with a near monopoly on the PC market and was beginning to make in-roads into the low-power computing segment with its Atom line of processors. While ARM did make better low-power chips compared to Intel, the ARM ecosystem was far less influential in 2007 than it is today. In 2007, Intel was arguably the best candidate to be the supplier of iPhone computing chips to Apple.

Apple was adamant on the pricing for the chip, while Intel forecast a higher cost and lower volumes. In hindsight, as Otellini noted, Intel’s cost forecast was wrong and iPhone volumes were 100X higher than anyone projected. Intel lost out on being the compute engine provider for the most successful consumer electronics product ever launched.

But more importantly, the company lost out on being the silicon platform provider for the entire post-PC wave of computing.

Apple proceeded to get the very first iPhone system-on-chip (SoC) (APL0098) manufactured by Samsung Semiconductor Ltd. in 2007. Then, in 2008, Apple made what was perceived to be an unusual acquisition — a small chip design start-up called PA Semi. This was perhaps the earliest indication of how far ahead Steve Jobs was thinking when he envisioned the future of the iPhone. As early as 2007, Steve Jobs was already convinced that silicon IC design would become a critical element of future smartphones and the only way for Apple to provide the best user experience would be to have complete control over silicon chip design and the entire silicon supply chain.

The PA Semi team became the nucleus of the present-day silicon engineering team at Apple. The APL series of SoCs (iPhone 3, 3G, 3GS) were designed and manufactured by Samsung, based on specifications from Apple. By 2010 (iPhone 4), Apple had already assembled a team large enough to fully design the application processor chip in-house and only use Samsung for manufacturing (as a foundry). Subsequent iPhone SoCs (A4, A5, A6 and A7) were designed in-house by Apple and only manufactured at Samsung. Apple continued to use Samsung as a foundry until 2014 (A8, iPhone 6). Since then, with the exception of one A9 SKU, TSMC has been the sole provider of Apple A-series SoC chips.

At face value, these may appear to be isolated business transactions between corporations. However, a deeper examination reveals far bigger implications that have profoundly changed the global semiconductor manufacturing landscape and have reshaped technology and industry dynamics in the US and the world for decades to come.

What follows is a discussion of some of the changes that resulted from that one seemingly isolated decision by Intel to walk away from being the SoC supplier for the original iPhone.

Semiconductor Manufacturing

When the iPhone was announced in 2007, the state of the art transistor technology node was 65 nm. Intel had introduced revolutionary strained silicon technology at the prior node (90 nm) which gave a significant boost to transistor performance. TSMC and the rest of the foundries were more than a full generation (2–3 years) behind and still grappling with Intel’s transistor advances and how best to copy them. The first iPhone was made on Samsung’s 90 nm technology which was a full generation behind Intel’s leading edge 65 nm technology at that time (2007).

Between 2007 and 2014, Samsung (Korea) was a key beneficiary of the iPhone phenomenon as volumes soared year after year. Samsung benefited from being the primary, direct supplier of leading node (90 nm, 65 nm, 40 nm, 28 nm) Apple processors until iPhone 6. During this time, TSMC (Taiwan) also benefited, albeit, as an indirect supplier of other iPhone chips to Apple via fab-less design companies (e.g. modems, sensors and connectivity chips from Qualcomm, Broadcom, NXP and others).

Since 2014, TSMC has been the primary beneficiary, both as a direct supplier to Apple (A-, S-, W-, M- series chips) but also as an indirect supplier for other leading edge and legacy node chips that go into Apple products.

When a semiconductor foundry (e.g. TSMC) manufactures chips for a large, high volume customer like Apple, it wins on multiple fronts. Analysts understandably tend to fixate on the revenue and financial metrics, which of course show marked gains. However, deeper technical implications create a virtuous cycle that strengthens the foundry technology roadmap.

It’s all about scale

For over four decades, Intel led the way in innovative transistor architectures which ensured geometric scaling in accordance with Moore’s Law. A key factor that enabled Intel to stay at the forefront of transistor scaling was that it became the predominant supplier of CPU chips in the early days of the PC wave of computing. The CPU was the primary enabling silicon platform of the PC era; and Intel, in collaboration with Microsoft established itself early on as the preeminent CPU provider for the PC industry. This lock on global CPU supply assured Intel of massive wafer volumes; which in-turn enabled quick yield learning and defect improvement; which in turn enabled volume ramps at high margins and massive revenues. These revenues in turn funded the research and development needed for the next technology node. This virtuous cycle enabled Intel to gain, and maintain technology leadership during the PC era, and in fact was a primary driver of Intel’s success as a semiconductor manufacturer. It is worth noting that Intel’s competitors in the PC era (notably, IBM and AMD) were never able to catch up to Intel’s manufacturing prowess precisely because they never commanded wafer volumes and a manufacturing scale and cadence to fuel this virtuous cycle (AMD and IBM both eventually sold off their manufacturing divisions).

To continue its leadership streak past the PC (CPU), Intel needed to ensure that it remained the preeminent provider of SoC chips for the mobile wave of computing. Apple’s decision to use Samsung (and later TSMC) as a foundry was thus a very significant strategic loss for Intel.

The virtuous cycle instead helped TSMC and Samsung strengthen their manufacturing technology programs during the mobile era. The iPhone provided TSMC with opportunities to increase wafer volumes at all nodes including legacy nodes (e.g. 40 nm and older) and advanced nodes (28 nm and newer). The legacy node wafer business allowed TSMC to run large volumes at full capacity on fully depreciated toolsets, in effect “printing money”. The advanced node, high volume and quick ramp products like Apple iPhone SoCs and Qualcomm modems were critical in helping TSMC debug and stabilize yields on the most complex, leading geometry process node, thereby quickly improving manufacturability and paving the way for subsequent waves of advanced node customers (e.g. AMD, NVIDIA, Qualcomm).

Without the massive volumes from Apple, it is unlikely that TSMC/Samsung would have been able to catch up to Intel on advanced node semiconductor manufacturing.

Samsung’s foundry business was largely developed for Apple as the anchor customer. But being the leading edge foundry for Apple helped Samsung get valuable yield learning for 5 consecutive technology nodes (90 nm, 65 nm, 40 nm, 32 nm and 28 nm). Samsung leveraged learning from these original SoC designs and built their own Exynos processors which power a large fraction of Android mobile phones today. Running large wafer volumes for Apple also enabled Samsung to rapidly ramp their own internal manufacturing as well. In effect, the iPhone indirectly launched Samsung as a credible foundry alternative to TSMC.

During the PC wave, Intel ran the majority of wafer volume and became the most advanced semiconductor company. During the mobile wave, it is TSMC that has the scale advantage and with it, the technology advantage too. In effect, whoever manufactures at scale first, wins.

TSMC now ships ~1M wafers per month (Link).

Design Ecosystem

The rise of mobile computing favored low power computing architectures (e.g. Arm) compared to the performance driven (x86) architecture from Intel for desktop and laptop PCs.

Here again, Apple’s decision to use Samsung (and later TSMC) as a foundry to make SoCs with core architecture IP licensed from Arm enabled the rise of the Arm ecosystem. Nearly every smartphone contains one or more chips with Arm IP made at TSMC or other Asian foundries. The foundries worked together with Arm and a variety of design automation (EDA) providers (e.g. Cadence, Synopsys, Mentor) to develop and standardize a process and design ecosystem. Here again, Intel was left at a disadvantage by not being part of a burgeoning design ecosystem that in effect became an industry standard.

Had Intel been the SoC provider for the original iPhone, it would have been able to influence and leverage a foundry standard design ecosystem, which in turn could have helped Intel become a dominant supplier for other smartphone providers besides Apple.

In just over 5 years, this strong design and foundry ecosystem enabled Apple (a relative novice in computer architecture and IC design) to quickly move from 32 bit to 64 bit architectures on a mobile SoC chip using off-the-shelf foundry silicon processes, an astounding feat given the relative weakness of the non-Intel design/process ecosystem just a few years prior to the iPhone.

Global Silicon Landscape and US National Interests

Intel, being the sole Integrated Device Manufacturer (IDM) in the United States has always relied on its manufacturing / technology lead as a significant competitive advantage over “fab-less” competitors (e.g. NVIDIA, Qualcomm, Broadcom). These fab-less companies have always relied on TSMC and other Asian foundries (e.g. UMC, Samsung) for their manufacturing needs and were historically at a process technology disadvantage to Intel.

During the PC wave, Intel was able to leverage its lead in semiconductor manufacturing to effectively fend off competition which relied on lagging technology from foundries like TSMC. Now that TSMC (and to a certain extent Samsung) have the most advanced semiconductor technology on par with or better than Intel, fabless competitors like NVIDIA and Apple have an inherent advantage.

Perhaps more importantly, this shift in manufacturing leadership across borders poses a serious threat to the national security interests of the United States. Advanced semiconductor manufacturing is a vital national asset and has always been viewed as such. US semiconductor companies have historically been subject to export licensing regulations which prohibit transfer of sensitive technology know-how to foreign entities (either via restricted hiring of foreign nationals or via setting up factories on foreign soil). Intel is now the only credible, leading edge, US based advanced semiconductor manufacturer.

The mobile wave of computing shifted the semiconductor landscape so that Asian companies (most notably, TSMC, Taiwan and Samsung, Korea) are at the forefront of semiconductor manufacturing and have caught up to Intel in its aggressive pursuit of Moore’s Law. In just over a decade, Semiconductor Manufacturing International Corporation (SMIC, China) has made remarkable progress, enabled largely by favorable regulation and massive funding by the Chinese government. China has deemed domestic semiconductor manufacturing as a national priority and the government is trying to enforce a “Made in China, Made for China” policy to ensure that silicon chips sold in the Chinese market are also made in China (McKinsey, Bloomberg, WSJ, WSJ). The Chinese government plan calls for Chinese-made chipsets to make up 40 percent of domestic needs by the end of the decade.

After decades of American dominance in both semiconductor design and chip manufacturing (fueled by the PC era), the tide is shifting to favor Asia (fueled by the mobile era). Decisions by US companies like Apple to promote Asian manufacturers and pro-active policy formulation by the Chinese government played a key role in this shift.

Manufacturing for AI: Advantage Asia

By firmly establishing itself as the foundry of choice during the mobile wave, TSMC now has the incumbent’s advantage in the AI wave of computing. Most of the AI enabling silicon technology platforms (e.g. GPU, FPGA, CPU, ASIC, connectivity) are already being manufactured in high volume at TSMC. System integrators like Google, Facebook, Tesla and Apple are now designing their own custom silicon for AI using TSMC or Samsung as a foundry. Chinese foundries like SMIC are at present well behind TSMC and Samsung, however with virtually unlimited government funding and protectionist state policy, SMIC will eventually play a significant role in future semiconductor manufacturing as well.

By not selecting Intel to be the manufacturer of iPhone application processor chips, Apple facilitated the rise of TSMC and Samsung as the leading silicon manufacturers for the mobile wave of computing.

The United States government should have done more over the last decade to protect domestic semiconductor manufacturing. Regaining semiconductor manufacturing competitiveness should be treated as a national priority — to ensure that foundational technology innovation continues to happen within the United States.

The views expressed herein are my own.