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How Qualcomm, Inc. Could Win Back Apple Inc. iPhone Modem Orders

Ashraf Eassa, The Motley Fool

For years, Apple (NASDAQ: AAPL) relied exclusively on cellular modem chips from Qualcomm (NASDAQ: QCOM) for its iPhone product lines. However, in the second half of 2016, Apple began sourcing modems from both Qualcomm and chip giant Intel (NASDAQ: INTC), a practice that continued with the iPhone models introduced in the second half of 2017.

Even worse for Qualcomm is that generally reliable analyst Ming-Chi Kuo with KGI Securities says that Intel is slated to win the entirety of the modem orders for the iPhones that Apple is expected to introduce later this year.

An Intel modem next to a penny and a pencil eraser

Image source: Intel.

Although things look great for Intel's position within Apple's iPhone and poor for Qualcomm's, there's one dynamic that could force Apple to move its cellular modem chip orders back to Qualcomm for the iPhones that will launch in the second half of 2019.

Intel's 10nm woes could strike again

The cellular modem that Intel is expected to supply into this year's upcoming iPhones is known as the XMM 7560. The XMM 7560 will be manufactured using Intel's own 14nm chip manufacturing process; the modems that Intel sold to Apple for the iPhone 7-series, 8-series, and X-series smartphones are manufactured by Taiwan Semiconductor Manufacturing Company (NYSE: TSM).

According to SemiAccurate's Charlie Demerjian, who regularly reports chip-related news, Intel's follow-on to the XMM 7560, the XMM 7660, is slated to be manufactured using Intel's newer 10nm manufacturing technology.

The official word from Intel is that mass production of its 10nm technology will happen during the second half of 2018. If Intel can hit this schedule, the technology should be ready to support Apple's iPhone launch in the second half of 2019.

However, there has been significant concern about the health of the company's 10nm technology. For example, chip-industry analyst David Schor recently said he has reason to believe that Intel won't hit its schedule of bringing 10nm into mass production this year.

In fact, he even expressed his skepticism that Intel would be able to ship its own microprocessors (the lifeblood of the company's business) built using this technology until sometime in the second half of 2019.

If Intel can't fix the issues associated with its 10nm manufacturing technology this year, then that could jeopardize the XMM 7660 schedule. In that case, Apple would have no choice but to turn to Qualcomm for modems to support its iPhone product launch during the second half of 2019.

Such a loss would sting Intel (especially if Intel goes from having the entirety of the orders for the 2018 iPhone models to none of the 2019 models) and prove a nice revenue boost for Qualcomm.

Could Intel win Apple back in this case?

If the worst does happen -- Apple is forced to abandon Intel and go with Qualcomm for all of the 2019 iPhone models, due to manufacturing issues on Intel's part -- then a question worth asking is whether Intel could win back that business.

If Intel could, then its cellular modem operations would remain financially viable; if not, I can't imagine that Intel could justify the significant costs associated with running the business without material revenue to support it.

My guess is that if 10nm issues cost Intel the 2019 iPhone, the company will stop using its internal chip-manufacturing operations to build future modems and would, instead, go back to using TSMC to manufacture those chips.

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Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.