The company set out to design a silicon chip that would allow it to cut ties with Qualcomm, a longtime supplier and bitter foe
5 min
The new iPhone models unveiled last week are missing a proprietary silicon chip that Apple had spent several years and billions of dollars trying to develop in time for the rollout.
The 2018 marching orders from Apple Chief Executive Tim Cook to design and build a modem chip—a part that connects iPhones to wireless carriers—led to the hiring of thousands of engineers. The goal was to sever Apple’s grudging dependence on Qualcomm, a longtime chip supplier that dominates the modem market.
The obstacles to finishing the chip were largely of Apple’s own making, according to former company engineers and executives familiar with the project.
Apple had planned to have its modem chip ready to use in the new iPhone models. But tests late last year found the chip was too slow and prone to overheating. Its circuit board was so big it would take up half an iPhone, making it unusable.
Investors had counted on Apple saving money with an in-house chip to help compensate for weak demand in the larger smartphone market. Apple—which hasn’t publicly acknowledged its modem project, much less its shortcomings—is estimated to have paid more than $7.2 billion to Qualcomm last year for the chips.
Engineering teams working on Apple’s modem chip have been slowed by technical challenges, poor communication and managers split over the wisdom of trying to design the chips rather than buy them, these people said. Teams were siloed in separate groups across the U.S. and abroad without a global leader. Some managers discouraged the airing of bad news from engineers about delays or setbacks, leading to unrealistic goals and blown deadlines.
“Just because Apple builds the best silicon on the planet, it’s ridiculous to think that they could also build a modem,” said former Apple wireless director Jaydeep Ranade, who left the company in 2018, the year the project began.
There were two reasons for the push, said former Apple executives and engineers familiar with the matter: Apple believed it could replicate the success of the microprocessor chips it designed for iPhones. Adoption of those chips fattened profit margins and improved performance for billions of devices. Second, Apple wanted to sever ties with Qualcomm, which it had accused in a 2017 lawsuit of overcharging for its patent royalties.
The companies settled the suit in 2019, and Apple, facing the expiration of its previous Qualcomm agreement, announced a deal last week to continue buying the company’s modem chips through 2026. Apple isn’t expected to produce a comparable chip until late 2025, people familiar with the matter said. There could be further delays, these people said, but the company believes it will eventually succeed.
Apple found that designing a microprocessor, essentially a tiny computer to run software, was easy by comparison. Modem chips, which transmit and receive wireless data, must comply with strict connectivity standards to serve wireless carriers around the world.
“These delays indicate Apple didn’t anticipate the complexity of the effort,” said Serge Willenegger, a former longtime Qualcomm executive who left the company in 2018 and doesn’t know the current state of the Apple chip. “Cellular is a monster.”
Apple’s push to build more of the various semiconductors used in its products stretches back more than a decade. In 2010, the company began using its own processing chips in iPhones and iPads. The chips helped Apple outperform many of its Android rivals, which relied on chips from Qualcomm, Taiwan-based MediaTek and other makers.
The company in 2020 began replacing processor chips from Intel, used for years in Mac computers, with a proprietary chip that allowed its laptops to run faster and generate less heat, improvements that helped boost flagging Mac sales. The Apple chip also saved the company an estimated $75 to $150 on every computer.
Credit for the success of Apple processor chips brought praise and increased authority to Johny Srouji, the company’s chip leader. “After shipping the first iPhone, we decided that the best way to deliver the best experience to our customers is to own and develop and design our silicon in-house,” Srouji said this year at Technion-Israel Institute of Technology, his alma mater.
Apple code-named its modem chip project Sinope, after the nymph in Greek mythology who outsmarted Zeus. It began taking shape in 2018, following the directive of Cook, Srouji, and others for Apple to build its own wireless components, said Chris Deaver, a former Apple human-resources executive and co-founder of BraveCore consultants.
By then, Apple’s relationship with Qualcomm had turned ugly. The companies bickered and swapped accusations of lying, theft and monopolistic practices.
Rubén Caballero, Apple’s longtime head of wireless, supported the Intel chip partnership at the time, while Srouji, senior vice president of hardware technologies, backed the pursuit of a company-built chip, said people involved in the project. Caballero left Apple in 2019.
Many members of Caballero’s team who were versed in wireless chip design were placed under Srouji. Other employees engaged in complementary wireless work, such as antenna design, were split off into the hardware engineering group. One of the top project managers on Srouji’s team had no background in wireless technology, said people who worked on the project.
Apple, which had been poaching engineering talent from Qualcomm for years, stepped up those efforts in March 2019. The company announced a new engineering hub in San Diego, Qualcomm’s hometown, and planned to add around 1,200 local jobs. That summer, Apple announced the acquisition of Intel’s wireless team and a portfolio of wireless patents.
Srouji flew to Munich to greet Apple’s newly acquired Intel wireless employees in December 2019. He told a gathering that the modem-chip project would be a game changer for Apple, the next step in the company’s evolution, said people who watched the meeting. He said the chip would distinguish Apple devices, as Apple’s processors had done.
As Apple filled the project’s ranks with Intel engineers and others hired from Qualcomm, company executives set a goal to have the modem chip ready for fall 2023. It soon became apparent to many of the wireless experts on the project that meeting the goal was impossible.
Apple found that employing the brute force of thousands of engineers, a strategy successful for designing the computer brain of its smartphones and laptops, wasn’t enough to quickly produce a superior modem chip.
Modem chips are trickier to make than processing chips because they must work seamlessly with 5G wireless networks, as well as the 2G, 3G and 4G networks used in countries around the world, each with its own technological quirks. Apple microprocessors run software programs designed solely for its iPhones and laptops.
Apple executives who didn’t have experience with wireless chips set tight timelines that weren’t realistic, former project engineers said. Teams had to build prototype versions of the chips and certify they would work with the many wireless carriers worldwide, a time-consuming job.
Executives better understood the challenge after Apple tested its prototypes late last year. The results weren’t good, according to people familiar with the tests. The chips were essentially three years behind Qualcomm’s best modem chip. Using them threatened to make iPhone wireless speeds slower than its competitors.
The company scratched plans to use the chips in Apple’s 2023 models, and the planned rollout was moved to 2024. Eventually, Apple executives realised the company wouldn’t meet that goal either. Apple instead opened negotiations with Qualcomm to continue supplying the modem chips. Apple’s licensing deal with Qualcomm expires in April 2025, though it can be extended for another two years.
Apple has the cash and the desire to keep pursuing its modem chip, according to people involved with the project.
“Apple isn’t going to give up,” said Edward Snyder, a managing director of Charter Equity Research and a wireless industry expert. “They hate Qualcomm’s living guts.”
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
4 min
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.
