There's probably no industry that exemplifies the global nature of manufacturing and trade more than the tech industry. And Apple is a primary mover in that arena: It gets computer chips designed by ARM, then licenses those designs and processes to other companies around the world, which both manufacture the chips and build on the designs, adding value and customizing them to Apple's needs.
In this segment from the Industry Focus: Tech podcast, Dylan Lewis and Evan Niu talk about what ARM Holdings does, how well they do it, what sets them apart from the competition, and how much of a difference their processors have made for Apple's products.
A transcript follows the video.
This podcast was recorded on May 27, 2016.
Dylan Lewis: What about ARM Holdings? Their semiconductor company providing processors for the iPhone, basically the chips that carry out operations set by the computer program.
Evan Niu: Right. The actual Apple processors are, I think, really interesting because you have ARM, which is a British company, and they design the chip architecture. They also design how to make the chips. They license this out to other companies to actually build and implement to use. They have a couple of different types of licenses, they have these kind of stock licenses for very specific processors. What they also have is an instruction set license, so you basically get access to the underlying architecture. You can actually really build on top of what they've done, and innovate, and really cater a chip's performance to your needs in terms of power, consumption power, efficiency, just actual computing power.
That's what the high-level companies do, like Qualcomm, Apple, Samsung. They all have instruction set licenses that allow them to really differentiate their chips. Before that, Apple was using pretty standard, off-the-shelf parts that were made by other companies. With the A4, starting in 2010, they put their own brand name on it and they're really differentiating. Now, all of a sudden they have 64-bit processors, which are like desktop class. They've done so much on their chips in the past five years that it's just insane. They've caught everyone off guard with how advanced they are. They barely even talked about it, too. In a classic kind of Apple way, they don't talk too much about the tech specs of it. They just say, it's so much faster. You don't need to know the clock speed or ...
Lewis: Eyes start to glaze over a little bit.
Niu: Yeah, exactly. Which a lot of people do, and it's a big branding strike that they can just be like, "Hey, it's done faster and it's desktop class." It's comparable to low-end desktops, but we're talking about a phone processor, so it's still pretty impressive in my opinion. From a supply chain perspective, it's also pretty interesting, because you have this British company that licenses out to Apple, who's in California. Then Apple goes and they do all their design work on top of that, and then they go and have contract manufacturing on the chip side. Samsung makes the chips for them; they recently added Taiwan Semiconductor (NYSE:TSM) as a chipmaker. Those are based in Korea, and Taiwan Semiconductor's in Taiwan. Samsung makes some of the chips in Austin, Texas. Just for this one chip, which is obviously a very important component, it comes from all over the world in terms of its own value chain. Then they also license the GPU technology from another British company, Imagination. You have this wide collection of companies in geographical areas, where they have to come together just for this one processor to come together, which is an incredibly important part of the device.
Lewis: Yeah, the sheer number of moving parts that go into Apple's supply chain is kind of baffling. If you want more of a taste of this listeners, if you google "Apple Supplier List 2015", the company makes available their top 200 suppliers. Some of them are within the same company but different addresses, but they estimate that their top 200 suppliers comprised about 97% of the procurement expenditures from materials, manufacturing, and assembly of products. You know, that is across all their product lines, but that gives you a pretty good sense of all of the different suppliers that wind up going into these Asian contract manufacturers.
Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.