Interesting news from Axios that has uncovered a collaboration between Google and Samsung to create customized silicon for Made by Google hardware, including Pixel smartphones and Pixel Chromebooks. This always seemed inevitable to me, given how much success custom silicon brings Apple. However, I put this move in a much more similar fashion to Microsoft’s custom silicon efforts for Surface than I do Apple’s.
Apple is truly creating custom-designed silicon across everything but perhaps the instruction set from ARM. It is unique and proprietary in nearly every way. The efforts of Google, which are more closely matched to Microsoft, seems more a joint-effort than a true custom solution. There is nothing wrong with this approach, and it is entirely understood since Apple is unique in that they have acquired and built a world-class semiconductor team inside Apple, where other companies simply don’t have this luxury. Microsoft and Google are able to work closely with partners to create versions of chipsets that are customized or tuned to specific things. This is a fine approach but very different from Apple’s.
Notably, Google is working with Samsung closely on this and not Qualcomm. This may very well be a tactical error, but we will have to see. I personally have begun losing confidence in Samsung’s Exynos architecture and Samsung devices running that chipset solution compared to Samsung devices running Qualcomm’s seem to have dramatic differences where Qualcomm’s has proved superior. It has been a not so secret rumor, that Samsung’s silicon efforts have been impacted a lack of success in getting customers who can drive volume. While their process technology still looks competitive, the custom chipset solutions they design seem to be lacking.
This is where Google will need to prove they have some architects who can help and are worth their value in architecture design, or they run the risk of having a part that is not competitive to Qualcomm flagships in their flagship Pixel smartphones and Chromebooks. Going down this road is a big bet for Google, even more so than Microsoft partnering with vetted leaders like Qualcomm, and AMD for their customized solutions. This will be an interesting one to watch develop.
Via analyst notes on the Chinese gov smartphone report.
Phone sales in China recovered in the month of March after an abnormally low February (~500k units) were up 414% month/month along with the overall smartphone market (up 232%) as the country emerged from a COVID-19 related lockdown. iPhone sales were up 20% on a YoY basis likely due to some pent-up demand.
Analysis of monthly gov’t smartphone data from China shows Apple outperformed the overall market. This was expected as Apple has a higher percentage of its sales in the country through online channels vs local retail outlets. iPhone sales were up 20% while the overall market was down 22% in the month of March. For the first quarter, Apple sales were down only 4% YoY compared to the overall market decline of 35%. We would expect market share shifts to normalize with economic recovery.
This looks like good news, and a signal of a similar dynamic in Western countries as parts of the world begin to open back up. The idea that smartphones have pent up demand is interesting, and numerous research reports I’ve read indicate that pent up demand could lead to an upswing in sales. While not everyone needs the latest and greatest flagship smartphone, and not everyone buys a phone every two years, there is a much larger segment of the market that simply need to upgrade because their device is broken or old and slow (as I like to call it). Outside of the Dec quarter, this steady flow of upgraders from devices that are old and slow continue to fuel the market on a per quarter basis. The uptick in China is likely due to this dynamic and is a signal it will happen in other markets. Even though this is a known factor, it will be incredibly difficult to predict the volume, which creates an interesting challenge for Apple uniquely.
Apple is among the best, if not the best, at managing manufacturing build orders to weeks to inventory. Apple is such an efficient operational machine that they are experts at building just what they need every quarter and not being stuck with loads of excess inventory. This efficiency, however, sometimes catches them off guard, and they end up being short on supply if demand exceeds the modeling data they are using. This has happened more than once to Apple in the last ten years.
I have no doubt Apple will see a lift, one that will be extremely hard to predict, once people get the confidence back to start spending again on things like smartphones. To that point, you could argue this lift could happen sooner than later if it becomes apparent our global shelter in place extends to the fall as people will realize themselves and perhaps their children are going to rely on technology even more as a part of work and learning from home.
I’ve said from the start of this COVID-19 situation, that it will prove which companies have strong leadership and which ones don’t. This is applicable in every type of company from hardware, software, and services. I know investors are heavily scrutinizing the management of all public companies and confidence in certain companies vs. others will be applied appropriately based on what is observed during this unprecedented time.