Apple Scores Some Major Chip Talent

Apple (NAS: AAPL) is dead set on building up its chip forces.

The Wall Street Journalis reporting that the iPhone maker has successfully poached a prominent chip engineer from frenemy Samsung. Jim Mergard spent the better part of 16 years working for Advanced Micro Devices (NYS: AMD) and played a key part in that chip maker's development of its low-power Brazos processors. He had since left the company to work for Samsung, who also has a large presence in Austin, Texas, like AMD.

Both Apple's custom-designed A5 and A6 processors are fabricated at Samsung's plant in Austin, and Apple has a corporate location in the city as well and is investing $300 million in the Live Music Capital of the World to further bolster its presence. It's unclear whether Mergard would be able to stay deep in the heart of Texas or if he would pack up and hitch a ride to Cupertino.

Talk abut DIY
The significance of chip design can't be stressed enough. Apple has taken its processor prowess to the next level with the A6 by utilizing the instruction set it licenses from ARM Holdings (NAS: ARMH) to design a custom ARM-compatible processor whose performance is on par with Qualcomm's (NAS: QCOM) leading ARM-compatible Snapdragons.

A-chips found in iPhones. Source: Apple.

In contrast, Samsung's Exynos chips pack in standard ARM cores instead of the more sophisticated approach that Apple and Qualcomm are taking. For example, the South Korean conglomerate's Exynos 4 chips use ARM Cortex A9 cores and its upcoming Exynos 5 chips will be among the first to market to use ARM Cortex A15 cores. These Cortex A15 cores were originally thought to be inside Apple's A6 before a deeper analysis by AnandTechshowed the iPhone 5 was actually packing custom cores.

Texas Instruments (NAS: TXN) is launching its OMAP 5 platform soon with ARM Cortex A15 cores inside, but the chip maker also recently decided to ditch pursuing mobile design wins -- including smartphones. Speaking of TI and chip engineers, there have also been reports that Apple is recruiting its disenchanted chip engineers amid TI's mobile identity crisis.

Using Apple's weapons against it
Strictly on the manufacturing side, Samsung has learned a lot building Apple's chips and is deploying that knowledge in its own offerings. The Exynos 5 platform will be built on the same 32-nanometer manufacturing process as Apple's A6.

That's another key reason Apple might be considering moving production to someone else like Taiwan Semiconductor Manufacturing (NYS: TSM) , what with Apple and Samsung continuing to battle for smartphone dominance. A new report from China says Apple might even switch to TSMC in late 2013 for quad-core 20-nanometer production. But then again, we've heard that one before.

What else can you do?
Mergard has extensive experience with system-on-a-chip, or SoC, design, so this is a major win for Apple. Former AMD exec Patrick Moorhead even goes as far as to say that Mergard could even help Apple produce its own custom processors for Macs, which could be a blow to Intel (NAS: INTC) .

Moorhead toldWSJ, "[Mergard] would be very capable of pulling together internal and external resources to do a PC processor for Apple." There is a major architectural difference though, since Macs run on x86 chips and iOS gadgets run on ARM-based silicon.

It's highly unlikely Apple could match Intel's performance in x86 chips any time soon, and changing architectures like it did when it switched to Intel in 2006 is a major undertaking with core software compatibility. Transitioning away from Intel chips in Macs in any form or fashion remains a monstrously tall order to fill, and would be many, many years away -- if ever.

The big picture
Apple is about as big a fan of vertical integration as it gets, and there is no component more important to computing performance than the processor. A-chips are one of the few pieces that Apple deems important enough to design in-house, while procuring most other components from third-party suppliers.

Longer-term, it seems possible that Apple could want to design all of the chips for all of its products in-house, and the strategic advantages are abundant. Apple could tailor chip performance and power efficiency specifically for its own purposes. There would be cost savings and other operational efficiencies, as well as providing a point of differentiation from competitors.

This idea may be but a twinkle in the back of Tim Cook's eye, but he should be around a while to see it through.

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Evan Niu, CFA, owns shares of Qualcomm and Apple. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Motley Fool newsletter services recommend Apple and Intel. 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.

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