Chip giant Intel (INTC -9.20%) recently disclosed that it had received a large prepayment from an unnamed customer to secure capacity on its Intel 18A process node. Intel 18A is scheduled to be ready by the end of 2024, and the company expects it to deliver a manufacturing edge over TSMC.
Intel's foundry business already has a few significant customer wins under its belt. The company reached an agreement with MediaTek last year to manufacture chips on Intel's advanced process nodes, and it recently scored Ericsson as a customer. Ericsson will rely on the Intel 18A process for future custom 5G system on chipsets (SoCs).
While the source of the large prepayment is a mystery, Citi analyst Christopher Danely thinks the customer is a "whale," or a customer that will spend far more than the average customer. There are only so many of those, and some seem unlikely. AMD and NVIDIA both compete with Intel in various ways, and while those companies may eventually consider Intel for manufacturing, neither is likely champing at the bit to do so.
Could it be Apple (AAPL -0.35%)?
Strong incentives
Apple sells hundreds of millions of devices each year, and most of them are powered by its own in-house chips. Apple is a TSMC customer, relying on the market-leading foundry to churn out enormous quantities of chips on the most advanced process nodes available in the industry. Apple's chip-design chops coupled with its use of cutting-edge manufacturing technology gives the company an important edge in its core markets.
With most of its suppliers, Apple has extreme leverage thanks to the volume of devices it ships each year. A company supplying a chip for Apple's iPhone has little ability to raise prices. Apple could choose an alternative supplier and yank away a massive chunk of revenue, or it could even decide to design its own chip. One example: Apple is reportedly working on custom chips to handle cellular connectivity, Wi-Fi, and Bluetooth.
With TSMC, Apple has little leverage because there is no viable alternative. Apple needs the most advanced manufacturing technology at massive volumes. While Apple used to rely on Samsung for some of its chips, TSMC has pulled far enough ahead technologically that it's the only game in town for all intents and purposes. Case in point: TSMC hiked wafer prices last year, and Apple had no choice but to accept the company's demands.
If Intel successfully brings its Intel 18A process online in late 2024 and fulfills its promise of leapfrogging TSMC, it's a whole new ballgame. Not only will there be more leading-edge manufacturing capacity available across the industry, but Apple will have far more leverage to negotiate pricing. Apple could split orders between TSMC and Intel, or at least threaten to do so to secure more favorable terms.
Apple or not, a big step forward
We won't know for a while which company has handed Intel a big check for Intel 18A capacity. It will be huge news if it's Apple, but any large semiconductor designer would be a big win for Intel. Intel is working with Arm to optimize Intel 18A for Arm-based chips, so any major smartphone chip designer is a possibility.
Intel's push into the foundry business has been a long, expensive journey, and it won't pay off until 2025 at the earliest as Intel 18A ramps up. But the big prepayment from a major customer is an indication that the company is on the right track.
