In late 2014, teardown reports revealed that Apple's (NASDAQ:AAPL) A8 applications processor that powered the then-new iPhone 6 smartphone series was manufactured exclusively by Taiwan Semiconductor Manufacturing Company (NYSE:TSM), or TSMC for short.
This represented a huge shift as Apple had previously contracted its longtime rival in the smartphone market, Samsung (NASDAQOTH: SSNLF), to build its custom-designed A-series chips. That move was a significant loss for Samsung's contract chip manufacturing division and a huge score for TSMC.
Although Apple tasked both Samsung and TSMC to manufacture the follow-on A9 processor that powered the iPhone 6s smartphone series, its A10 Fusion and A11 Bionic chips have both been built exclusively by TSMC. According to a new report, this time from DIGITIMES, Apple seems to have also entrusted TSMC with the entirety of the orders for its upcoming A12 applications processor.
The business implications
In the current product cycle, Apple is selling devices powered by its A9 (iPhone SE, iPhone 6s, and iPhone 6s Plus), A10 Fusion (iPhone 7 and iPhone 7 Plus), and A11 Bionic (iPhone 8, iPhone 8 Plus, and iPhone X) processors. This means that TSMC is building a substantial majority of iPhone applications processors, though Samsung is likely generating a small amount of revenue by supplying some of the A9 chips into Apple's lowest-end products.
During the next product cycle, Apple is likely to stop selling A9-based iPhones altogether, with the A10 Fusion becoming the lowest-end applications processor shipping in a commercially available iPhone.
However, since TSMC's share of the iPhone applications processor business is already so high, I don't expect share gains against Samsung at Apple in the next product cycle to drive substantial revenue growth for TSMC or a commensurate revenue decline at Samsung.
The real test
While TSMC seems to have won all of the A12 orders, DIGITIMES says that Samsung is "aggressively carrying out a spate of countermeasures" to combat TSMC's seemingly growing technology lead.
If Samsung puts together technology that's good enough to get Apple to move some, if not most, of its chip orders into its own factories, then that'd be a huge win. That being said, such a move is likely to be quite difficult. Samsung had a reasonably competitive offering with its 10-nanometer LPE technology (this went into production before TSMC's own 10-nanometer did) and it couldn't win any of Apple's A11 chip orders.
Samsung also seems to be behind TSMC in terms of bringing its own 7-nanometer technology into mass production, something that not only seems to have made it an easy decision for Apple to stay with TSMC but is also reportedly leading Qualcomm to defect back to TSMC after moving its high-end chip orders to Samsung exclusively for several product generations.
On top of that, TSMC is extremely well-run. It's quite aware of the possibility of Samsung recapturing at least some of Apple's chip orders, so it seems to be investing quite heavily in future manufacturing technologies to try to keep its lead.
Investors should keep an eye out for credible rumors about the potential manufacturer of Apple's A13 applications processor -- and beyond -- to get a sense of how this battle between TSMC and Samsung is playing out.