Intel Corporation May Build Chips for Mid-Range Samsung Smartphones

Image source: Intel.

Microprocessor giant Intel's(NASDAQ: INTC) organic efforts to build applications processors targeted at the smartphone market saw little success over the last five years or so. The company could never quite build chips that offered compelling enough performance, power consumption, and features to convince major smartphone manufacturers to adopt its solutions over, say, those of major players such as Qualcomm (NASDAQ: QCOM), MediaTek, and others.

Although Intel is currently not an active participant in the smartphone applications processor market, the company has made it clear that it intends to continue to participate in it as a contract manufacturer for other chip designers.One such deal that's been publicly known about for quite some time is the tie-up between Intel and mobile processor maker Spreadtrum. Though neither company has said much about the products that they will be building together, Digitimes has a very interesting scoop vis-a-vis this partnership.

Products sampling soon, aiming for Samsung smartphones

Digitimes says that Spreadtrum will begin "sample shipments" of its chips built in Intel's 14-nanometer manufacturing technology "starting in October." Spreadtrum is apparently "looking to grab orders for Samsung's mid-range smartphone series for 2017," according to Digitimes' "industry sources."

Although winning spots inside of Samsung's mid-range phones is certainly not as glamorous as winning spots in the company's Galaxy S and Galaxy Note flagships, a significant portion of the smartphones that Samsung sells are low-end and mid-range handsets.Samsung tends to use many different suppliers for these mid-range and low-end phones (e.g. Samsung's own chips, Qualcomm, Spreadtrum, and reportedly soon MediaTek), so pricing is probably competitive and margins are likely relatively slim.

Nevertheless, that's probably more Spreadtrum's problem than Intel's. Contract chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) achieves an average gross profit margin of around 50% these days building mobile chips for third parties, who then go on to sell those TSMC-produced chips at 30%+ gross profit margins.As long as Intel's cost structure is under control, it should be able to profit nicely from its partnership with Spreadtrum, even in an aggressive pricing environment for smartphone processors.

Why this partnership is important

Spreadtrum is a major smartphone applications processor supplier, so if Spreadtrum achieves success with Intel's 14-nanometer technology -- a good first indicator would be if Samsung ultimately chooses to use these Intel-built Spreadtrum chips in mid-range smartphones -- it could conceivably use Intel's 10-nanometer process in the future, as well as 14-nanometer for future, likely lower-end, parts.

More importantly, though, I suspect that many potential Intel foundry customers are waiting to see how things go with Intel and Spreadtrum. Intel's pitch has been that it has the world's best manufacturing technology in terms of performance, power, and area. If Spreadtrum's products bear out those claims, then that could compel other smartphone applications processor makers to sign on with Intel rather than use TSMC or another contract chip manufacturer.

However, if Spreadtrum's products don't enjoy a significant competitive advantage as a result of being built on Intel's tech, then Intel's near-to-medium term opportunities as a contract chip manufacturer for mobile processors may be limited until something fundamentally changes (e.g. Intel's technology becomes more competitive, it becomes more aggressive on pricing, or something else).

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Ashraf Eassa owns shares of Intel and Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends 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.