Intel’s Latest Agreement With ARM To Boost Its Foundry Business For Leading Edge Products

In conjunction with the recent Intel Developers Conference, Intel (NYSE:INTC)  announced an agreement with the British processor core designer ARM, according to which it can now deliver chips based on ARM’s Artisan Physical IP on its 10 nano-meter design platform. This deal is significant for Intel, as other leading chip makers are expected to follow Intel in its migration from a 14 nano-meter or a larger process nodes to this 10 nano-meter process.  As always, finer geometries yield superior performance and smaller devices, which will enhance the performance of the devices. Among the major players in the foundry business, Intel seems to be ruling the transition to this leading edge process node. This factor, combined with the addition of ARM’s Artisan Physical IP degsign environment, should help Intel win more orders going ahead.  Smartphone giant LG Electronics has already announced its intention to use Intel’s foundries for 10nm chip development.

There are other reasons as well, which makes this deal important for Intel. The strategic partnership with ARM can help Intel to grow its position in the Internet of Things (IoT) market, where ARM is uniquely positioned due to its power efficient and compact processor core designs. Further, this deal can have a positive impact on Intel’s margins, due to increased utilization of its foundry capacity, which has likely been affected due to declining PC sales. Furthermore, the company can participate in the growth of smartphone market, where its market share is negligible and ARM, via the partners that us its cores, has a dominant position.

PC Shipment Decline Has Weighed Heavy On Intel’s Growth

Intel’s PC processor revenues, which constituted around 55% of its overall revenues in 2015, declined by around 8% in the year. The decline in PC shipments is due both to slower upgrade cycles and consumers’ increased focus the mobile computing enabled by smartphones and tablets.  In sum, we believe growth in the PC shipments will at best remain in coming years.

According to reports, Intel has cut back the production of its new chips in 2016 in the wake of low demand for PCs. Because of this, the company’s foundries might be currently underutilized, which can have a negative impact on its margins going ahead. However, if Intel can improve the utilization of its foundries by accepting new orders from other ARM based chip makers, the company should be able to prevent its margins from declining.

ARM Uniquely Positioned In IoT And Smartphone Markets

ARM, which is being acquired by Softbank, licenses its architecture to a majority of smartphone chipmakers. Unlike Intel’s x86 architecture which is based on CISC (Complex instruction set computing), ARM’s architecture is based on RISC (Reduced instruction set computing). This helps ARM based chips to have more power saving features, while Intel’s x86 chips consume more power at the cost of higher performance. This factor, along with the late entry of Intel, helped ARM to gain a leadership position in the smartphone processor market. We believe that ARM can exploit the IoT market similarly as it ruled the smartphone processor business. Hence, Intel’s latest deal with ARM should help it participate in both IoT and the smartphone market boom, which it missed in the past.

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