In 2014, Apple (AAPL 0.27%) had Taiwan Semiconductor Manufacturing Company (TSM +4.49%) -- rather than longtime chip partner Samsung (NASDAQOTH: SSNLF) -- build its then-new A8 processors that powered the hugely successful iPhone 6 and iPhone 6 Plus.
Although TSMC and Samsung split the manufacturing of the subsequent A9 processor, TSMC was the sole manufacturer of the A10 Fusion chip that powered the iPhone 7-series smartphones and is believed to be the sole manufacturer of the A11 Bionic chip that powers both the iPhone 8-series phones as well as the iPhone X.
Image source: Apple.
TSMC has clearly been a good partner of Apple's, and I wouldn't be surprised to see Apple continue to have TSMC manufacture most, if not all, of its chips going forward.
However, there is a risk factor that TSMC stockholders shouldn't ignore.
Samsung's broad portfolio
Samsung is a large conglomerate that does more than serve as a contract chip manufacturer. It's the world's largest manufacturer of DRAM and NAND flash, and the largest vendor of organic light emitting diode (OLED) displays for mobile devices, among other things.
Samsung is believed to be the sole supplier of the OLED displays used in Apple's new iPhone X. According to The Wall Street Journal, which cites an analysis from Counterpoint Research, the Korean conglomerate is expected to supply Apple with about 40% of its DRAM needs and almost 40% of its NAND flash needs.
On top of that, the analysis claims that Samsung provides a significant portion of the batteries and multilayer ceramic capacitors used in Apple's iPhones. And, finally, the analysis seems to indicate that Samsung will see a dramatic increase in its share of the radio frequency printed circuit boards (RFPCBs) that Apple will buy in the next few years.
Some of the components, like DRAM and NAND, Apple can source elsewhere, but a key one -- the customized OLED display that's crucial to the iPhone X and is said to be quite expensive -- remains a Samsung-exclusive until other display vendors can pull their acts together.
This is a problem for TSMC.
Samsung can offer bundles that TSMC can't
Samsung's ability to competently supply multiple important components can potentially allow it to convince Apple to shift some of its logic chip orders away from TSMC and to Samsung's factories.
Think of it this way. TSMC is in the business of manufacturing and selling logic chip wafers. This means that for its business to thrive -- that is, for it to achieve the revenue and profitability that its investors expect -- it needs to sell lots of logic chip wafers at relatively high margins (TSMC's corporate average gross profit margin is around 50%).
Samsung, on the other hand, doesn't need to do any such thing. Samsung is minting cash from the continued surge in DRAM and NAND prices, and its sole-source status for the mobile OLED display technology that's quickly becoming a necessity in high-end smartphones should also help boost the profitability of its display panel business.
Samsung's contract chip manufacturing business isn't that important a part of the revenue or profitability of its semiconductor business, so if it can offer technology like what TSMC can, Samsung can dramatically undercut TSMC and it's still a win for Samsung's overall business.
How does TSMC fight back?
TSMC has one intrinsic advantage over Samsung with respect to Apple chip manufacturing: independence.
Samsung's chip manufacturing operations are, at the end of the day, part of the overall Samsung Electronics company. This company contains Samsung Mobile, which is arguably Apple's fiercest competitor in the premium smartphone market.
Much of Apple's innovation lies in its custom-designed applications processors; putting this technology in the hands of a major competitor -- even with all the intellectual property firewalls in the world -- probably isn't the smartest move.
Beyond banking on Apple's desire to keep its intellectual property safe, TSMC's best bet is to try to outrun Samsung in terms of technology density and performance.
Based on numbers published by Intel -- which recently provided a competitive comparison of its upcoming 10-nanometer technology with the 10-nanometer technologies in production at Samsung and TSMC -- TSMC seems to have a technology lead over Samsung.
In terms of key physical dimensions, TSMC's 10-nanometer technology has tighter gate, metal, and fin pitches compared to Samsung's. Intel also seems to indicate that at higher performance and power levels, TSMC's 10-nanometer technology is slightly faster than Samsung's (though Samsung's is apparently more efficient at the lower end of the power/performance range).
Image source: Intel.
I'd say that TSMC has an overall lead over Samsung at the 10-nanometer generation, but if it wants to securely remain Apple's sole supplier, it needs to take steps to maintain its density leadership and start widening its lead in terms of performance.
