Past a small lobby through a plain set of double doors.
Welcome to one of our chip labs.
There's a simple room filled with a couple hundred machines, blinking lights, a handful of engineers
in lab coats, and a bunch of postage stamp-sized chips being put through rigorous
testing.
Our goal is to be able to find bugs,
manufacturing issues, design issues.
We want to find them so that we can fix them and address them before we
ship our chips into our systems.
Apple has enjoyed soaring valuation for years thanks to its forward facing consumer products
MacBook, iPhone, Apple Watch, AirPods.
But under the hood, it's also designing its own custom silicon that powers them all.
Mac transition is a proud moment.
When we started scaling our chips to iPad and watches, proud moment.
Building chips for the AirPods that you couldn't chip otherwise,proud moment.
Apple first debuted its own semiconductors in iPhones in 2010.
As of June this year, all new Mac computers are powered by Apple's own silicon too,
ending the company's 15-plus years of reliance on Intel.
I think one of the most, if not the most profound change at Apple, certainly in our products over
the last 20 years, is how we now do so many of those technologies in-house.
But Apple isn't immune to industry risks.
All its most advanced silicon is manufactured by one player, Taiwan Semiconductor Manufacturing
Company. Smartphones are just recovering from a deep sales slump, and competitors
like Microsoft are making big leaps in generative AI.
It's doable. On Apple's last year chip, even more capable on this year's chip with M3, but
the software has got to catch up with that, so the developers take advantage and write again
tomorrow's AI software on Apple Silicon.
CNBC went to the company's California headquarters, where we were the first journalists
allowed to film inside an Apple chip lab and got a rare chance to talk with the head of silicon
about how it broke into the incredibly expensive, complex business of processors, kicking
off a trend of non-chip companies like Amazon, Google, Microsoft and Tesla now
rushing to do the same.
Apple launched the first iPhone in June 2007 with a 90 nanometer processor inside made by
Samsung. In 2008, Johny Srouji came on board after stints at IBM and
Intel.
I came to Apple with the purpose of building our own silicon for the iPhone.
It was a very small team at the time, about 40 to 50 engineers,
and since then we have grown the team immensely.
A month after Srouji joined, Apple bought 150-person chip startup PA Semiconductor for
$278 million.
They're going to start doing their own chips.
That was the immediate takeaway when they bought PA Semi.
Just I think knowing the culture of Apple, their inherent design focus to to
control as much of the stack.
Indeed, two years later, Apple launched its first custom chip, the A4, in the original
iPad and the iPhone four.
And we built what we call the unified memory architecture that is scalable across products.
We built an architecture that you start with the iPhone, but then we scaled it to the iPad
and then to the watch and eventually to the Mac.
Now, Apple Silicon team has scaled to thousands of engineers working across chip labs in places
like Israel, Germany, Austria, the UK, Japan and the U.S.
in Austin, San Diego and Silicon Valley, where we were the first journalists to ever film inside
one. On either side of me, there's about 70 machines testing chips, and these are the M3
series that are going in the new MacBooks, as well as the A-series chips that end up in iPhone
15s. And these machines in particular are testing them for extreme temperatures, high
heat, low temperatures, things like that.
Our board holders, we've kind of color-coded them.
And what that does is that makes it easier for our engineers and
technicians to just be able to spot, oh, I'm looking for an M3
validation board.
The primary type of chips Apple is developing here are known as systems on a chip or SoCs.
It is the silicon and all of the blocks that go on to that silicon.
So there's CPU, there's GPU, there's DSP, there's accelerators.
And in Apple's case there's also an NPU that runs the neural engines.
Apple's first SoC was the A-series, which has advanced from the A4 in 2010 to the
A17 Pro, announced in September.
It's the central processor in iPhones, as well as some iPads, Apple TVs and HomePod.
Its other major SoC is the M series, now powering all new Macs and more advanced
iPads. First released in 2020, it's now up to the M3 Macs.
The S series is a smaller system in packagem,or SIP, for Apple Watch.
First launched in 2015, H and W are even smaller chips used in
AirPods. U chips allow communication between Apple devices and the newest
chip, the R1, is for Apple's Vision Pro headset, processing input and streaming images to the
display within 12 milliseconds.
We get to design the chips ahead of time, working with our partners from John's team on software and
OS to exactly and precisely build chips that are going to be targeted for those products
and only for those products.
The H2 inside the second-gen AirPods Pro, for instance, enables better noise cancellation
inside the new series 9 Apple Watch The S9 enables unusual capabilities like double
tap. On the iPhone side, the A11 Bionic in 2017 was a major milestone
because it had the first Apple Neural Engine, a dedicated part of the SoC for performing
tasks totally on device.
That was when we first started looking at, wow, how do we bring this advanced intelligence
into things like our camera pipeline?
So things in iOS 17 today, like being able to lift the subject from
a photo.
Now leading marketing for the iPhone, Kaiann Drance has been with Apple for more than 15 years.
She says the latest A17 Pro is another major leap forward, enabling big changes
to features like computational photography.
You can take seven different shots all from the same location.
This is a macro shot, and then you've got the ultra-wide lens at 13mm.
With iPhone 15 Pro Max, you can go all the way up to 5x optical zoom.
The A17 Pro's new GPU architecture also enables advanced rendering for gaming on
the iPhone 15 Pro.
It was actually the biggest redesign in GPU architecture in Apple, in Apple silicon history.
So we have hardware accelerated ray tracing for the first time, and we have mesh shading
acceleration, which allows game developers to create some really stunning visual effects.
Now, for the first time, some big games are coming out with iPhone native versions Ubisoft's
Assassin's Creed Mirage, The Division Resurgence, and Capcom's Resident Evil 4.
Apple says the A17 Pro is the first 3 nanometer chip to ship at high volume.
The reason we use three nanometer is it gives us the ability to pack more transistors
in a given dimension that is important for the product and much
better power efficiency.
We're leading. Even though we're not a chip company, we are leading the industry for a reason.
Apple's leap to 3 nanometer continued with the M3 chips for Macs announced in October.
These are the main chips CNBC saw being tested in Cupertino.
We've got one of those M3's in this thermal station.
We have a socket and then the chip is in there, and then the thermal actuator
is is kind of applying heat or cold
directly on the package of the SoC.
The M3 line enables new features like 22-hour battery life and like the A17
Pro, boosted graphics performance.
It's early days. We have a lot of work to do, but I think there's so many Macs now.
Pretty much all Macs are capable of running Triple-A titles, which is not what it was like
five years ago.
Now, Apple's hardware chief, John Ternus, has been with the company for 22 years.
When I started, the way we tended to make products is we were using technologies from other companies
and we were effectively building the product around that.
We had, we've always had an incredible design team and we made these beautiful products, but they
were they were constrained by what was available.
In a major shift for the semi industry.
Apple turned away from using Intel's PC processors in 2020, switching to its own
M1 chip inside the MacBook Air and other Macs.
It was almost like the laws of physics had changed.
Like, all of a sudden we could build a MacBook Air.
That incredibly thin and light, has no fan, 18 hours of battery life, and
outperformed the MacBook Pro that we had just been shipping, and we just launched a
MacBook Pro with M3 Max that is 11 times faster than the fastest Intel
MacBook Pro we were making, and we were shipping that just two years ago.
Intel processors are based on x86 architecture, the traditional choice for PC makers
because a lot of software is developed for it.
But Apple bases its processors on rival ARM architecture, known for using less power,
helping laptop batteries last longer.
The M1 was a proving point for ARM-based processors in high end PCs, with others like
Qualcomm, AMD and Nvidia now developing ARM-based processors too.
In September, Apple extended its deal with ARM through at least 2040, back when its
first custom chip came out.
13 years ago, Apple was the only major non-chip company trying to make it in the cutthroat, cost
prohibitive semiconductor market.
Apple is sort of the trailblazer.
They sort of showed that if you do this, you can have a stab at differentiating your products.
And certainly more players have gone down that route.
In the last few years.
Amazon, Google, Microsoft and Tesla are among the other behemoths that can afford to try their hand
at custom chips.
I think what everybody was looking for was, does this really bring them a true sustainable
advantage? Because that's really the question.
It's an expensive endeavor.
Designing your own chips is incredibly expensive.
Is this CapEx sustainable?
We have thousands of engineers.
But if you look at the portfolio of chips, we do very lean actually,
so very efficient.
Again, because we focus on the quality of engineers we hire, we focus how
we run our teams.
And because we're not really selling chips outside, we focus on the product.
And that gives us freedom to optimize.
And the scalable architecture lets us reuse pieces between different
products.
But Apple isn't yet making every piece of silicon at its devices.
Modems, for instance, are one big component Apple has yet to conquer on its own.
And their processors have been remarkably good.
Where they've struggled is on the modem side, is on the radio side in the phones.
Modems are hard.
And they've been struggling with it.
Apple uses Qualcomm for its modems, but that relationship is strained following a two-year
legal battle over IP.
A settlement brought an end to all legal action in 2019, and then Apple bought the majority of
Intel's 5G modem business for $1 billion in a move to develop its own cellular modem.
That hasn't happened yet, and in September, Apple signed on with Qualcomm to supply its modems
through at least 2026.
Qualcomm still makes the best modems in the world, and honestly, until
Apple can do as good of a job, I have a hard time seeing them fully jump to
that.
Talk to me about what's going on in modems and the recent announcement to extend the
deal with Qualcomm and why that decision was made.
We have a strong team internally working on enabling enabling technologies
that would elevate our products.
But I can't really give you much on comment on future technologies and products for
obvious reasons.
But we care about cellular and we have teams enabling that.
I would argue personally that the longer it takes Apple to move away,
the more likely it is that they will never do it because it's a moving target and it's hard.
That being said, Apple's got a very good semiconductor business in general, like I wouldn't
put anything past them.
Apple is reportedly working on its own Wi-Fi and Bluetooth chip, but for now, it's got a fresh
multi-billion dollar deal with Broadcom for wireless components, and it relies on outsiders
like Samsung and Micron for memory.
Does Apple have aspirations to be in charge of every single part of the chip, including,
let's say, memory?
Our aspiration is the product.
We want to build the best products on the planet as a technology team, which also includes the
chips in this case.
If there is a technology that we can buy off the shelf and that
delivers to our objective for the product, we'll do it because I want to focus the team on what
really, really matters.
Regardless of how much of it silicone needs Apple manages to design in-house, it'll still need to
manufacture its chips externally at massive fabrication plants owned by foundry companies like
TSMC.
It's like anybody else.
I mean, they need leading edge semiconductors.
There's one place, mostly one place.
You get those right now, which is Taiwan.
This leaves Apple, like all advanced chip companies, vulnerable amid China's mounting
threats of invading Taiwan.
I think there is obviously a lot of tension around, like what would plan B be if
that happened? There isn't another good option.
You would hope that Samsung is also competitive and Intel wants to be there.
But again, we're not. Right now.
It's really all at TSMC.
That's why Apple has committed to becoming the largest customer at TSMC's coming fab in
Arizona.
We always want to have a diversified supply.
Asia, Europe and the U.S., which is why I think TSMC building fabs in Arizona is
great and other founders are doing the same.
There are other foundries, Samsung and Intel and others building in the U.S., so I think that's
great.
But another concern is the shortage of skilled chip labor in the U.S., where advanced fabs
haven't been built for decades.
TSMC says its Arizona fab is now delayed to 2025 because of a lack of skilled
workers. Some have also asked if a fierce talent war for good chip engineers has led to a
slowdown in Apple's release of new chips.
There's been questions about why the iPhone line might have had last year's
processor in the lower end, and then the newest processor.
Some of that also, I think, just might have to do with capacity at TSMC.
Generations are taking longer because they are getting harder and harder, and the
ability to pack more and get power efficiency is also different
than ten years ago.
But given again, I think this is actually one of the advantages that Apple has
because we're not a chip company.
So I don't need to worry about where do I sell my chips?
In 2019, Apple's chip architect Gerard Williams left suddenly to lead a data center chip
startup called Nuvia, bringing some Apple engineers with him.
Apple sued Williams over IP concerns, then dropped the case this year.
Qualcomm bought Nuvia in 2021, in a move to compete in ARM-based processors like
Apple's.
I can't really discuss legal matters, but we truly care about IP protection.
When certain people leave for certain reasons, that's their choice.
That's fine.
And again, as I mentioned, we have thousands of engineers and we have a deep bench of talent.
Another challenge facing the whole industry is that smartphone sales are just rebounding from
their lowest levels in years.
Smartphones have been horrible, right.
And part of the issue is like what is smartphones?
They all look like this. It's like some some black rectangle of glass.
So the industry is playing with things like they're playing with things like foldables.
I think people right now are now hoping that maybe AI will drive an upgrade.
Thanks to hype around large language models like ChatGPT, the need for silicon has skyrocketed in
recent months, primarily on the graphics processor side, where companies like Nvidia and
AMD dominate.
But non-chip companies are also getting in on the trend.
Google has designed a tensor processing unit for AI since 2016.
Amazon Web Services has had its own AI chips for the data center since 2018, and
now Microsoft has a new chip released in November.
What does Apple have in the works when it comes to AI chips?
An A11 Bionic, which we shipped in 2017 and given typically we start a chip many
years ahead. It tells you how long we started.
We actually started.
We built our machine learning engine.
We call it the Apple Neural Engine, and that's one compute element.
We have embedded machine learning accelerators and our CPU.
We have our highly optimized GPU for machine learning.
Apple's neural engines power what it calls on-device machine learning features like Face ID
and Animojis.
We continue to push and we continue to see more and more applications, more features in our
operating system that take advantage of this, and that's a really exciting time.
In July, Apple reportedly built its own large language model called Ajax and a chat bot called
Apple GPT. It's also acquired more than two dozen companies since
2015. Critics have been surprised that Apple appears to be falling behind when
it comes to AI.
How do you respond?
I don't believe we are.
Not to worried. Not to worried.
And actually, we have an advantage.
Again, going back to, we own the silicon, the hardware, the software, the machine
learning all in one team.
We're going to optimize for that.
All the things we've seen about generative AI start to come to these devices at a platform
level, right? Apple hasn't been there yet.
You know, Apple had an opportunity to really get on that from day one, but I
think everyone expects it's coming in the coming year.
In the meantime, Apple is getting ready to ship its entirely new R1 line of chips for the Vision
Pro early next year, which means thousands of engineers like D'Souza will be running them
through rigorous testing behind closed doors at Apple's chip labs all over the world.
It's just a source of great pride to say, okay, we worked on this
and, you know, here's the end product that we're actually using.
It's fascinating.