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.
