Apple Just Can't Quit Samsung

Recent announcements suggest that Apple just can't quit buying chips from Samsung.

Apr 21, 2014 at 11:00PM

Ahead of every Apple (NASDAQ:AAPL) product launch, there's always been some rumor here, some claim there that Apple would be building its next-generation A-series chip at Taiwan Semiconductor (NYSE:TSM) rather than at its longtime manufacturing partner, Samsung (NASDAQOTH:SSNLF). There's a very clear conflict of interest with this particular Apple/Samsung partnership, but it seems that despite the bad blood that runs between both companies, Apple just can't quit Samsung.

20-nanometer goes to Apple, but back to Samsung at 14-nanometer?
At the 20-nanometer generation, it seems that Apple has moved more or less to Taiwan Semiconductor. This makes sense, given that Samsung doesn't really appear to be advertising its 20-nanometer process (although whispers of poor yields have made their rounds) and has been making quite the splash with a series of 14-nanometer related announcements. This should provide a pretty substantial boost to TSMC for the next Apple product cycle.

However, given the recent deal between Samsung and Global Foundries to essentially synchronize their 14-nanometer processes (i.e., Global Foundries is licensing Samsung's manufacturing recipe), it seems that Apple may be making a move back to Samsung's process, built at both Samsung's factories and Global Foundries'. It remains unclear if TSMC will remain a source for these Apple chips beyond the 20-nanometer node.

Potentially negative for TSMC; nice win for Samsung
While TSMC will get the boost at 20-nanometer, it is likely to split those volumes across Samsung, Global Foundries, and TSMC at 14/16-nanometer and beyond, which will prove a negative for TSMC by the late 2015-to-early 2016 timeframe. More to the point, as Samsung generally gets stronger as a foundry, it stands a chance of taking some pretty meaningful share from TSMC.

This is actually not all that great for Apple, since as long as Samsung continues to see the influx of foundry dollars required to invest in future development, it will continue to have pretty meaningful power over Apple since the performance of the A-chips is a key differentiator for Apple's iPhone. With Samsung a strong, well-funded foundry, it will bring the same technology to its own in-house apps processors (or to its foundry customers, which may be Apple competitors).

That said, Apple could play the supplier squeeze game ...
The good news, though, is that if Apple has Global Foundries, Samsung, and TSMC to choose from, it can probably negotiate some pretty good wafer prices, which will be especially handy as these wafers become more expensive to build. Also, with multiple suppliers, Apple de-risks moves to leading-edge manufacturing technologies, as there will be multiple sources there to supply them.

Foolish bottom line
With Samsung apparently getting extremely competitive at the 14-nanometer generation and in light of the Samsung/Global Foundries deal, it seems that Apple can't really quit Samsung and that TSMC's top- and bottom-line growth could come under pretty significant pressure as a result of a margin squeeze for leading-edge foundry capacity as well as share loss. Interesting times ahead in the semiconductor industry!

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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