Changes At Apple Hint At An Even Greater Level Of Vertical Integration

Apple  has become famous for developing much of its own technology in-house -- or "vertical integration." But recent changes show just how integral that philosophy is to the company's strategy going forward.

On Thursday, Apple announced a number of executive shifts, including naming Jeff William as the new COO. Apple also announced that Johny Srouji is joining the executive team as senior vice president for hardware. Srouji, who's best known for introducing Apple's custom A-series chips for iPhones and iPads as well as the Touch ID fingerprint sensor, has a long history of chip engineering at Intel and IBM before joining Apple in 2008. By bringing on Srouji as an executive, Apple will likely continue deeper down that path of vertical integration on all the components that go into making Apple products competitive, said chip analyst Patrick Moorhead.

"Apple is going to be engaged with creating more of its own intellectual property," Moorhead said. "It wants to put more of its own IP into its products. IP has a seat at the table, where it had typically been fronted by product groups before. The A9 people's seat at the table used to be through the iPhone and iPad. With Srouji, they now have a seat at the table. They get more time with Jony Ive and Tim Cook."

Srouji's new role has him reporting directly to Cook. In addition to his work on Apple's semiconductor work, Srouji has been involved in the development of the sensors and batteries that go into Apple products. As Apple works on more wildly ambitious projects, such as the much-rumored car, these custom-built components will become an even more key strategic asset for Apple.

Since Apple embarked on making its own chips with the introduction of the A4 in the first-generation iPad in 2010, the company has emerged as one of the most important chip makers in the world -- even though it only develops silicon for its own devices. Apple has pushed much of the chip industry forward. In 2013, for example, Apple's A7 chip that came in the iPhone 5s was the first 64-bit processor in a smartphone, and that hit chip companies like Qualcomm hard. The San Diego chip maker had to scramble to come out with its own 64-bit product, leading to the disastrous Snapdragon 810 launch.

Now, with the A9x processor found in the recent iPad Pro, Apple has made another jump. The processor has been referred to as a "desktop-class" chip. For years, there have been rumors that Apple is interested in cutting out Intel of its Mac computers. It appears Apple is closer than ever to achieving that dream with its recent advancements in processor technology.

Before Srouji, Bob Mansfield had served as senior vice president of technologies, where he oversaw the company's wireless and chip teams. Mansfield stepped down as an executive in 2013 to lead a new group vaguely called "Technologies," which brought his focus more onto chips engineering while reducing management duties.

In another move in this direction towards greater vertical integration, Bloomberg reported this week that Apple has opened up a laboratory in Taiwan for developing LCD and OLED screen technologies. The building used to be owned by a Qualcomm division developing display technology, before the chip maker sold it off in 2014.  Bloomberg reported that Apple is using the lab to create thinner, brighter, lighter and more energy efficient displays for all its devices. Apple can then start cutting out third-party display manufacturers like Samsung, LG and Sharp.

Also this week, Apple paid $18.2 million for a 70,000-square-foot chip fab that in North San Jose, as reported by the Silicon Valley Business Journal. The facility used to be owned by Maxim Integrated Products , and before that, Samsung. The facility stands right next to a 10-story building being built by Samsung Semiconductor. But there's likely not much to be made of this news, since the size of the facility is nowhere close to being enough space for a full-fledged manufacturing facility for chips. As well, the facility is only equipped to fabricate transistors as small as 90 nanometers, and Apple's latest A9 processor is built at 14nm and 16nm.

Down the road, analyst Moorhead speculates that Apple could eventually seek to push its components and IP into other products, considering all the money and time they've spent developing these technologies over the past few years. Apple could, for instance, sell a processor from a few years back to lower-end device manufactures where Apple doesn't compete for market share. But developing technologies for other companies' products is of course not the Apple way. "I think this is kind of a long shot," Moorhead admits.

Google also seeks more control of third-party smartphone designs coming out for its Android mobile operating system. It's in discussion with chip makers on custom Android chips, as first reported by the Information. One source with knowledge of discussions told Forbes that Google has been in talks with both Intel and Qualcomm on an Android-specified chip.