- It is no secret that Apple is thinking of moving its chip manufacturing from Samsung to TSMC, but while everyone is getting excited about the technology, everyone is ignoring the economics.
- Apple’s first applications processor was heavily dependent on Samsung technology and ever since Apple’s acquisition of PA Semi it has been working to design out Samsung’s technology and replace it with its own.
- This makes perfect sense because designing its own chips allows the hardware and software to be more tightly integrated giving a faster more responsive user experience and less battery consumption.
- All of Apple’s chips from the A1 to A6 have been exclusively manufactured by Samsung LSI and there has been a long running discussion round whether Apple will switch to TSMC for the A7 and beyond.
- One would expect the A7 to debut in either the iPad 4 or the iPhone 7 during 2013.
- This makes perfect sense from a strategic point of view, as Apple and Samsung can hardly be described as having a good relationship and a vast percentage of Apple’s COGS already heads to Samsung.
- Hence reducing its reliance on Samsung looks like a sensible move.
- Consequently, everyone is jumping up and down about A7 on 20nm and quad core and the benefits that these might bring to Apple devices but no one has asked: How much will it cost?
- Samsung LSI is an upstart in the world of foundry and still has a very long way to go to challenge the scale and power of TSMC.
- It has been investing like crazy to expand its operations over the last two years but it still has to win a lot of share to become a big player.
- Consequently, I strongly believe that Samsung LSI was (and still is) prepared to accept mid 20s margins on its business to Apple in order to win the business in the first place.
- I think that this has been a contributing factor behind Apple’s ability to earn margins on its devices that its competitors can only dream of.
- TSMC, on the other hand, earns somewhere around low to mid thirties on the business that it does with its many clients.
- Clients, which I suspect will be somewhat put-out should Apple be given an exclusive and sweetheart deal to move to TSMC.
- Is Apple’s business worth alienating the rest of its user base? I suspect not.
- As a result, I think that it will be much easier said than done for Apple to move its foundry business from Samsung to TSMC given the cost increase that it would entail.
- I do not think that TSMC is about to lower its margins to everybody by around 100bp to accommodate Apple, and hence believe that if Apple wants to be with TSMC it will have to accept the same conditions as everyone else.
- Therefore I do not see Apple moving to TSMC as a dead cert because the same service is very likely to cost a lot more there than at Samsung LSI.
- Apple and Samsung may not be great friends but I have long believed that Samsung is very good at keeping its different businesses at arm’s length.
- Hence, the fact that Apple and Samsung are at war over handsets and tablets will have no effect on the way Samsung treats Apple when it comes to component supply and foundry services.
- I am far from convinced that we will see Apple going anywhere anytime soon.
Blog Comments
Tim Nash
October 15, 2012 at 1:44 pm
– Apple will use about 250 million ARM chips this FY for iPhone, iPad, iPod
– it therefore makes sense to second source with TSMC (or another major foundry)
– given TSMC capacity constraints, Apple may use its cash to finance the new line(s)
– as TSMC wouldn’t have to risk capital and would have guaranteed sales it could give Apple a better margin than its other customers
windsorr
October 16, 2012 at 11:16 am
Agreed. second source makes sence but when you take a 10% margin hit as a result, its something you would lthink about very carefully!
Adam Nealis
October 15, 2012 at 7:49 pm
I agree with the comment on Samsung keeping its businesses separate.
It’s only businesslike/ rational.
I don’t know how much revenue goes to Samsung from Apple’s chip orders, but it would be cutting off their nose to spite their face if they were to drop Apple.
windsorr
October 16, 2012 at 11:14 am
Hi Adam…Its the other way round. Samsung would love to keep Apple on board. Its a question whethr Apple leaves or not. Apple spends a VAST ammounts with Samsung. Around 8% of its COGS or so is the latest estimste which equates to a staggering $9bn in 2012!!!!!