As the global semiconductor supply chain based on specialization, the design and development of Application Processors (AP) or System on Chip (SoC) for smartphones primarily fall under the responsibility of IC design houses. In the wake of Apple’s notable success in pioneering in-house chips, other smartphone companies are now emulating this trend.
Developing in-house chips poses a challenge for smartphone brands, involving not only significant initial investments but also the navigation of various modules and architectures on the smartphone’s SoCs, including ISP and Modem. Balancing performance and power consumption optimally in specific application scenarios tests the R&D skills of designers, presenting a particularly challenging task for brands lacking relevant technological expertise. However, fueled by the ambition to “product differentiation” and “have a say in the market,” smartphone brands remain enthusiastic about venturing into in-house chips.
Smartphone Brands and SoC Dilemma
In current specialization, smartphone brands typically purchase SoC chips from IC design companies like Qualcomm or MediaTek. While they can fine-tune chip performance to suit the brand’s needs after purchase, the room for modification is quite limited.
Currently, smartphone product development is reaching maturity, and the market lacks innovation. For consumers, in the intensely competitive landscape, smartphones equipped with similar-level SoCs from Qualcomm may only differ in terms of “pricing” as a determining factor for purchase. If the market shifts into a price competition, it becomes unprofitable for smartphone brands.
Moreover, without the ability to develop in-house SoC, smartphone brands become dependent on IC design companies. If IC design companies alter their fee structures or take measures such as raising prices or adding licensing fees, brands have little choice but to comply, significantly impacting their profits.
As the central component of smartphones, if brands can design everything from scratch, it enables them to create product differentiation and gain a competitive edge. Although the initial investment is substantial, in the long run, it allows smartphone brands to have a say in the market.
Apple’s in-house SoC chip has become a significant standard for other smartphone brands in shaping their strategies. Examining Apple’s development trends, the success of the iPhone is largely attributed to Apple’s creation of powerful and efficient SoC chips.
Apple’s decision not to rely on IC design companies but to design chips in-house allowed iPhone to surpass other competing smartphone products. The key lies in Apple’s ability to plan for hardware and software from the ground up through its self-designed SoC architecture, achieving a high level of product differentiation. In addition to creating the most suitable SoC for the iPhone, it also solidifies a unique competitive advantage for Apple.
The Costly Pursuit on SoC
However, venturing into in-house chips poses formidable challenges for smartphone brands. The primary hurdle lies in the necessity for a substantial financial investment. According to statistics from The New York Times, Apple invested about US$10 billion in developing the A4 chip, while Apple’s revenue at that time was approximately US$65 billion. At that time, the smartphone market was not saturated at that time and was still in the development stage, providing ample room for Apple’s growth.
Focus on the data, from 2010 to 2011, Apple’s revenue generated from selling iPhones grew from about US$25.2 billion to approximately US$45.9 billion, with a growth rate of about 82%. Apple’s revenue scale surpassed US$100 billion in 2012. With a huge and sufficient revenue scale support and the market still having growth potential, although self-developing chips require a large amount of investment, it is indeed feasible for Apple, whose iPhone business is thriving.
In the current mature and competitive smartphone market, creating product differentiation is the only way to break through. As most Chinese smartphone brands lack the technology to develop SoC, it becomes trending to adopt new strategy of developing in-house chips. Apart from self-developing SoC, some brands also choose to enter from the “specific function chip” on the smartphone.
Next Challenges in Plateauing Market
However, compared to the smartphone market situation when Apple initially turned to in-house SoC, current market has entered a plateau phase from the previous golden growth period. Brands find it difficult to generate sufficient revenue scale to support the high cost of in-house chips in the saturated and competitive market.
Moreover, with the continuous advancement of semiconductor process technology, the current cost to enter is much higher comparing to the past. Even with funds. Achieving in-house SoC involves a significant technical threshold, and it is challenging to bypass patents, especially when competitors have accumulated decades of experience.
Therefore, while the strategy of brands choosing to self-develop chips is likely to impact IC design companies like Qualcomm and MediaTek, its effects are expected to be limited. The reason is that for IC design companies like MediaTek and Qualcomm, they already occupy a place in the market with exclusive key technologies and accumulated intellectual property rights (IP), making it challenging for smartphone brands’ in-house chips to completely replace MediaTek and Qualcomm products.