Apple Plans To Ditch Broadcom And Qualcomm And Make Its Own Chips, Testing The Limits Of Insourcing

Apple’s plans to break up relations with critical component suppliers will be challenging. The tech giant is expected to encounter several legal and economic constraints, testing the limits of insourcing.

Apple is rethinking the way it makes its products. It is gradually shifting from relying on external suppliers for critical components to making them in-house.

A few years ago, the iPhone maker broke its 15-year partnership with Intel making its chips for desktop and laptop computers rather than using microprocessors from Intel.

“It’s worth noting that Apple has been gradually moving away from external suppliers in recent years and has a history of making its chips, such as the A-series chips in its iPhone and iPad, so it’s not a new concept for them,” Dvir Ben-Aroya, CEO of email application company Spike, told International Business Times.

Apple wants to end its partnership with Broadcom and Qualcomm and develop its own Wi-Fi and Bluetooth chips, according to a Bloomberg News report that circulated through financial and tech media last week.

In principle, this is a good move. It will allow the company to control its supply chain better and save the billions of dollars it pays Broadcom and Qualcomm.

“This is in line with Apple’s moves in the past several years,” Kevin Gordon, vice-president of AI technologies at NexOptic, an AI imaging solutions company, told IBT. “For example, it dropped Intel and chose instead to rely on its variant of Arm IP (processor intellectual property). And don’t forget Apple has had its silicon IP since it introduced the iPhone.”

Ben-Aroya sees Apple as having better control over the design and development of its chips, allowing the company to develop more tailored and optimized solutions for its products. “Additionally, it could potentially reduce costs and increase profits by not relying on external chip suppliers,” he said.

Shri Ganeshram, founder and CEO at Awning, sees Apple’s new strategy as giving Apple more flexibility in terms of cost and production and adding another “moat” to the company, a competitive advantage.

“Additionally, creating their chipsets would give the company more control over their supply chain, which is a primary concern for Apple, “he told IBT.

Still, breaking up long-term relations in tech can be challenging. It involves patent issues, which turn into legal disputes that can cost a great deal for Apple both in legal fees and executive time.

“The risks involved if Apple begins making its chips include potential legal ramifications,” said Gordon. “Especially if there’s any intellectual property contamination. There might be issues around rolling out Apple’s version of its chip technology. But the company has proven itself competent with chip design, so further vertical integration will likely pay off. It’s a tech giant for a reason.”

Meanwhile, making components in-house rather than buying them from third parties raise the old economic issue of insourcing versus outsourcing in the division of labor.

In addressing this issue, economists and business strategists look at the opportunity costs of resources committed to making products in-house versus what they would have to pay third parties to buy these products. In addition, they raise the issue of the core competencies developed through specialization.

“Designing and manufacturing chips is a complex and resource-intensive process, so it is possible that Apple may not have the expertise or resources to do it as effectively as established chipmakers like Broadcom and Qualcomm,” added Ben-Aroya. “It could also lead to higher R&D costs and disruption to the supply chain.”

“Overall, while there are certainly benefits to Apple making its microchips, there are also significant risks,” added Ganeshram. “It will be interesting to see how this decision plays out and how it impacts Apple’s business in the long term.”

That’s why Paul Kutasovic, a professor of finance at the New York Institute of Technology, sees Apple’s new strategy as a “big test” for the growing insourcing trend.