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ARM Turns Up Pressure on Intel as Even Cutlery Gets Smart

February 19, 2013

ARM Turns Up Pressure on Intel as Even Cutlery Gets Smart

ARM’s advantages in faster-growing markets like mobile and intelligent systems are reflected in its shares, which trade at 49 times projected earnings, compared with a price-to-earnings ratio of about 10 for Intel. Photographer: Chris Ratcliffe/Bloomberg

ARM Holdings Plc, which has sprinted ahead of Intel Corp. (INTC:US) in the market for mobile chips, poses a threat to its rival in another burgeoning business: semiconductors for machines ranging from cars to cutlery.

So-called embedded processing is ARM’s fastest-growing market, surging 25 percent in 2012. ARM got more than half of its sales from products other than mobile phones for the first time in the third quarter, and last month ARM Chief Executive Officer Warren East said the percentage will continue to rise.

Companies are snapping up chips that make dashboard stereos, utility meters and other everyday appliances more computer-like, and revenue from embedded processors will climb 23 percent to $47.3 billion in 2016 from 2012, according to researcher IDC. That’s fueling demand for ARM’s technology, used by chipmakers such as Freescale Semiconductor Ltd. and Texas Instruments Inc., helping the U.K.-based designer gain an edge over Intel.

“Intel is trying to get into the market, but ARM is already there,” said Mali Venkatesan, an analyst at IDC, a Framingham, Massachusetts-based market researcher.

Intel remains the leader in chips for personal computers, with more than 80 percent of the world’s PCs running on its processors. With the PC market shrinking for the first time in a decade in 2012 and poised for another drop in 2013, the world’s largest chipmaker is in need of new businesses to fuel growth.

Intel’s Challenge

ARM’s advantages in faster-growing markets like mobile and intelligent systems are reflected in its shares, which trade at 49 times projected earnings, compared with a price-to-earnings ratio of about 10 for Intel. ARM stock has jumped 59 percent in the past year, while shares of its larger rival have dropped 21 percent. Even with ARM’s high valuation, 40 percent of analysts who follow the company recommend buying the stock, compared with 36 percent for Intel.

ARM shares climbed 0.3 percent to 925.50 pence at 10:39 a.m. in London, giving the company a market value of 12.8 billion pounds ($20 billion).

Getting products adopted in fresh markets has been a challenge for Santa Clara, California-based Intel. Last year, Intel commanded less than 1 percent of the mobile-phone processor market and 2 percent of shipments for embedded processors, which IDC estimates will increase to 3.65 billion processors in 2016, from 2.54 billion last year.

ARM’s embedded market share will reach 68 percent in 2016, up from 60 percent in 2012, according to IDC research on what it calls intelligent systems -- common devices that are becoming more interactive through technology. Intel’s slice will go to 5 percent, IDC predicts.

Revenue Share

Still, while Intel’s shipments are a fraction of ARM’s, its embedded chips are more expensive and capable of more complex computing, giving the company a disproportionate stake of the market’s revenue, according to IDC. Intel technology accounted for 20 percent of embedded processor revenues last year, compared with 30 percent for ARM-based designs. The other 50 percent was distributed among other chipmakers.

Embedded processing is the building of computing capabilities and connectivity into devices and machinery that previously stood alone. Companies are rushing to turn vehicles into networks of sensors and minicomputers that can make sure drivers have access to their iTunes libraries or stop the vehicle if the brakes aren’t hit early enough.

Everyday equipment like thermostats and electricity meters are being linked up to the Internet, requiring processors to analyze data and transmit or receive instructions. Even some forks now analyze how fast you eat, so you can slow down to lose weight or ease digestion.

‘Ubiquitous’ ARM

Device makers and their chip suppliers are turning to ARM designs because its dominance in smartphones has drawn a flood of software developers and engineers to the technology, making it easier and cheaper to standardize.

“It has become ubiquitous and everyone wants to design off of it,” said Hans Mosesmann, an analyst at Raymond James & Associates Inc. “It’s a monumental task to offset the tsunami that’s happening. We’re big fans of the non-smartphone part of their business.”

Cambridge, England-based ARM doesn’t make semiconductors itself -- it sells processor designs and licenses fundamental chip technology to companies including Texas Instruments, Samsung Electronics Co. and Qualcomm Inc. ARM’s annual sales, which reached $914.4 million in 2012, are a fraction of Intel’s more than $50 billion in revenue.

Automotive, Retail

Intel, meantime, is focusing on the automotive, retail and industrial-control markets, trying to bring a greater ability to analyze data locally and keep it secure, said Ton Steenman, who heads Intel’s Intelligent Systems group.

Intel’s chips and software are now in phone systems, PepsiCo Inc.’s smart vending machines that can vary sales pitches, entertainment systems in cars made by Bayerische Motoren Werke AG and Kia Motors Corp., and in industrial tools such as automated farm machinery that can run at night, he said.

“We are not building solutions today that control a little valve and doesn’t do much more than that,” said Steenman. “We are investing in the type of application where the richness of the data processing is a key attribute. That is where there is a lot more differentiated and sustainable value that can be created.”

While East said it took longer than he expected for non- phone-related sales to become the majority of ARM’s revenue, he expects that percentage to keep rising as the surge in smartphone demand lures more software developers and hardware engineers to his company’s technology.

Awaiting ‘Bang’

Consumers have become used to the convenience and capacity of smartphones, and are starting to expect similar functionality and ease of use from televisions and other electronic devices, East said in an interview last month. That will happen when software begins to take more advantage of the capabilities of small, power-efficient chips commonly seen in phones, he said.

“That’s the way the technology market works: It’s these things that anyone in their right mind can see is going to happen, but there’s always inertia,” East said in the interview. “The technology solution is in place, but it seems to take forever and ever to happen. Then when it happens, bang, it happens quickly.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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