Huawei, one of the top smartphone vendors by volume, is apparently looking for a second source for the manufacture of its custom-designed Kirin applications processors, according to DIGITIMES.
DIGITIMES says that Huawei is looking to diversify from its current manufacturing partner, Taiwan Semiconductor Manufacturing Company, "to ensure sufficient production capacity for its 7nm solutions."
This come as TSMC has reportedly won back chip orders from wireless chip giant Qualcomm. If TSMC is handling future chip production for both Qualcomm and Apple -- the two highest-volume producers of chips that go into high-end smartphones -- then Huawei risks being deprioritized due to its relatively low volume of high-end smartphone shipments.
Although the report says that multiple chipmakers are trying to nab Huawei's orders, I'd like to focus on what I think is the most interesting name dropped in the report: Intel (NASDAQ:INTC).
Intel wants Huawei chip orders
DIGITIMES says that Intel is "vying aggressively" for Huawei's chip orders with its 10-nanometer manufacturing technology. This isn't surprising considering that at Intel's Technology and Manufacturing Day in China event in September, Intel Custom Foundry General Manager Zane Ball gave a detailed presentation explaining its efforts to offer chip manufacturing services to third parties, with mobile processor vendors being a key target for these efforts.
By building others' mobile chip designs, Intel likely hopes to profit from the large market for mobile processors, as its in-house mobile processor design efforts failed. Winning Huawei's chip orders wouldn't be a game-changer for Intel's business, but it would easily represent Intel's biggest contract chip manufacturing win to date and would help the company gain valuable experience that it could use to try to win orders from other mobile chip designers.
If Intel can become a major contract chip manufacturer, then that could be a good source of additional revenue over the long term.
Stay skeptical of success
Although Huawei seemingly wants a second source for chip manufacturing, I think investors should remain skeptical that Intel can ultimately close the deal.
Intel has been talking about its contract chip manufacturing ambitions for years now, and so far, the business still isn't generating meaningful revenue. Moreover, Intel's manufacturing technologies have seen repeated delays, which have not only negatively impacted the competitiveness of Intel's internally designed products (which are a far higher priority for Intel's business), but have also hurt the competitiveness of Intel's technologies compared to other contract chip manufacturers' technologies.
Any company that chooses to use Intel as a contract chip manufacturer would, in my view, be taking a significant risk. If Intel can't ensure that its manufacturing technologies are ready on time to support the bulk of its roughly $60 billion in annual revenue, what confidence can a company like Huawei have that Intel will deliver for it? If Huawei is looking for a second source to TSMC because it's worried that Apple and Qualcomm are going to hog all of TSMC's leading-edge manufacturing capacity, then it might be smarter for Huawei to pick a chip manufacturer with a better track record.
Ashraf Eassa owns shares of INTC and QCOM. The Motley Fool owns shares of and recommends AAPL. The Motley Fool owns shares of QCOM and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends INTC. The Motley Fool has a disclosure policy.