Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the world's largest contract chip manufacturer. It manufactures chips for some of the largest, most powerful companies like Apple (NASDAQ:AAPL) as well as for small chip companies you might not have ever heard of.
TSMC is in the unique situation of having a very strong position inside of Apple's iPhone line of smartphones -- it is believed to be the exclusive manufacturer of Apple's custom-designed A10 processor and it is also believed to be the manufacturer of the Qualcomm (NASDAQ:QCOM) Snapdragon X12 and Intel (NASDAQ:INTC) XMM 7360 cellular modems found inside of each iPhone sold today.
Going forward, it looks as though TSMC is set to see revenues from iPhone cellular modems vanish.
Gone either this cycle, or next
If Apple chooses to reuse the Snapdragon X12 modem as well as adopt Intel's XMM 7480 cellular modem for the upcoming iPhone product cycle, then TSMC should enjoy another year of cellular modem revenues (since the XMM 7480 is also believed to be manufactured at TSMC).
However, after that it is likely that Apple will adopt the Intel XMM 7560 cellular modem as well as either the Qualcomm Snapdragon X16 or Snapdragon X20 modem (if it doesn't ultimately adopt one of them this cycle).
The Snapdragon X16 is manufactured by Samsung (NASDAQOTH: SSNLF) on its 14-nanometer LPP technology and the Snapdragon X20 is manufactured by Samsung using its 10-nanometer LPE technology.
The Intel XMM 7560 is, unlike previous Intel modems, manufactured by Intel itself using some variant of its 14-nanometer manufacturing technology.
So, at some point within the next iPhone cycle or two, Apple is likely going to be sourcing modems from both Qualcomm and Intel that aren't manufactured by TSMC.
What does this mean for TSMC's business?
If we assume that this business is worth something on the order of $1 billion in annual revenue (200 million units multiplied by a rough estimate of $5 per unit), then -- all else equal -- TSMC stands to see a roughly 3% revenue decline from the eventual loss of this business (based on current analyst consensus which calls for TSMC to rake in about $32.22 billion in revenue this year).
That's certainly less than ideal, but such a loss isn't going to dramatically impact the company's financial position. After all, the company still benefits from the growth of the overall smartphone market (as it is a critical supplier of many key smartphone processor makers) and I wouldn't be surprised to see silicon content within smartphones continue to grow in the years ahead as smartphones continue to integrate more features and functionality.
In other words, TSMC should be able to more than make up the potential declines elsewhere within the mobile market.
What about for Intel's and Samsung's?
Samsung's contract chip manufacturing business used to rely on the manufacture of Apple's A-series applications processors, but it seems to have lost that business to TSMC for the foreseeable future. Getting some logic silicon content in the iPhone again via the manufacture of Qualcomm's modems certainly can't hurt.
A similar argument applies to Intel. The company is looking to expand its total addressable market partly to grow revenue and partly to continue to have enough chip scale to keep its expensive factories filled with chips. By manufacturing and shipping tens of millions, if not more than 100 million cellular baseband chips (eventually) annually, the company has quite a lot of "guaranteed" volume for its factories year-in and year-out.
In other words, I'd say that TSMC losing business to Intel and Samsung is probably more of a positive for the latter two's businesses than it is a negative for TSMC.