TSMC Shakes Up Apple-Samsung Partnership

July 1, 2013, 3:49 AM

TSMC Shakes Up Apple-Samsung Partnership

By Lorraine Luk and Min-Jeong Lee

Taiwan Semiconductor Manufacturing Co. 2330.TW -2.70% has pulled off its biggest coup yet: winning over Apple AAPL +0.69% Inc. as a chip client and, in the process, giving heavyweight rival Samsung Electronics Co. 005930.SE -1.19% a poke in the eye.

It’s no surprise that Apple would seek to move away from Samsung as their competition in the smartphone market becomes more heated.  But TSMC may have to wait a while to feel the full benefit of Apple’s switch, analysts say. For the next year, at least, Samsung will still be supplying chips to Apple.Nevertheless, the new supply deal for iPad and iPhone chips will give TSMC a boost as it adopts costly new manufacturing technology, analysts said. TSMC is the world’s largest contract manufacturer of chips by revenue.

“The deal would represent an important new leading-edge customer for TSMC to help support the expensive R&D and capex investment requirements TSMC needs to make on the more advanced technology nodes,” said Credit Suisse CSGN.VX +1.32% analyst Randy Abrams.

Orders from Apple will account for about 8% of TSMC’s total revenue in 2014, Mr. Abrams estimates, assuming that the U.S. company would ramp up orders late in the first quarter next year and outsource 30% of its chip requirements to TSMC. That could rise to 15% of TSMC’s revenue by 2015 if Apple buys 60% of the chips it needs from TSMC, he said.

Analysts say Samsung will likely seek to fill the loss of Apple orders by churning out chips for its own products and other chip makers like Qualcomm Inc. QCOM +0.02%Samsung has supplied microprocessors to Apple since the Cupertino, Calif.-company launched its first iPhone in 2007. With TSMC in the picture, however, Apple may find it hard to source DRAM and NAND chips from Samsung, said KDB Daewoo Securities analyst James Song.

Samsung’s margins for its application processors are already estimated to be lower in comparison to its memory-chips business, and would likely be squeezed further by Apple’s shift to TSMC, said Jae H. Lee, a senior analyst at Daiwa Securities. Improving those margins would require better chips and a broader client base, he added.

Winning Apple as a client provides TSMC a cushion against a slide in orders from existing clients as well as rising competition from both Samsung and Intel in the contract chip manufacturing business, Mr. Abrams said. TSMC’s major clients include Qualcomm Advanced Micro Devices Inc. AMD 0.00%, and Texas Instruments Inc. TXN 0.00%

However, analysts said it is unlikely for Apple to shift all chip manufacturing orders to TSMC because Apple would prefer to diversify its supply base to cut risk.

“It also does not justify the effort to move Apple’s old chips that are still used in Apple’s older versions of iPhones and iPads. In addition to Samsung and TSMC, Intel is a very credible contender for Apple’s foundry business as well,” said Mark Li, an analyst at Bernstein Research.

Most of TSMC’s plants are located in earthquake-prone Taiwan, but the island’s well-developed semiconductor supply chain makes it the best location for future plants, said analysts.

TSMC, which already has a plant in Camas, Washington, “is always evaluating various locations for plant expansion, and the U.S. could be one of the options,” Chairman Morris Chang said on Dec. 14, a week after Apple Chief Executive Tim Cook said it plans to make some Mac computers in the U.S. for the first time in about a decade.

Apart from the Washington plant, the Taiwanese company has 10 production sites across Taiwan and one facility each in Singapore and Shanghai.