Intel warned not to take Apple's business

Rumours that fashion bag maker  Intel might pick up some of Apple’s chip making work might not be such good news, according to Goldman Sachs’ top beancounter.

Barrons reports James Covello dashed off a note to clients that warns that it could harm Intel if it gets some of Apple’s contract manufacturing business.

Apple and Samsung are keen to part company and that means Apple has to find a new contractor to make the chips for its future shiny toys.

But Covello warns that the prospect, he writes, should concern investors if it were to come to pass.

He said that investors were on the blower all the time wondering if Intel becoming Apple’s foundry was a good thing, given Intel’s current excess capacity and manufacturing ability.

Covello said that he has been telling them that it is not because getting Apple’s business would be bad for Intel’s gross margin, at an estimated 25 percent to 30 percent.

This will mean a “drag of about 400 basis points” to Intel’s gross margin, on a blended basis with the rest of Intel’s business. That is assuming that Chipzilla could get a total revenue of perhaps $8.9 billion by 2016 if the deal worked.

His figures are based on estimates from his chum Michael Bang, who predicts Samsung will see as much as 80 percent of its foundry business with Apple go away over the next five years.

The whole deal reminded Covello of how Intel bounced when it started making NAND memory chips with Micron in 2005, only to be followed by an 11.5 per cent fall in the three months that followed.

Covello thinks it would be better for Chipzilla to stop going after foundry businesses, and rein in capacity to boost margins.

Intel could save money on capital investment and capacity and this would help margins to recover to 60 percent plus during the next cycle by keeping its factories full with its own higher-margin MPUs.