Contract chip manufacturing giant Taiwan Semiconductor Manufacturing Company (NYSE:TSM), or TSMC for short, recently said that it expects industrywide smartphone shipments will grow at a low-single-digit (1-3%) pace during 2018.
TSMC is the key manufacturing partner for many mobile chip designers, including Apple (NASDAQ:AAPL), MediaTek, and HiSilicon (the chip development division of Huawei, the world's third-largest smartphone vendor).
What's possibly most interesting about TSMC's expectations is that the company said it thinks shipments of high-end smartphones will decline in 2018, while low-end and midrange smartphone shipments will grow.
Here are three implications investors can draw from TSMC's comments.
1. Flat smartphone revenue for TSMC
TSMC co-CEO C.C. Wei said during the company's most recent earnings conference call that although it expects low-single-digit smartphone chip unit growth, it thinks its smartphone-related revenue will be flat relative to 2017 levels.
To understand why this is the case, it's important to understand that not all smartphone chips are made equal. Chips destined for high-end smartphones are usually built on TSMC's most advanced manufacturing technologies and the chips themselves tend to incorporate more features and functionality than those destined for low-end and midrange smartphones.
Since TSMC charges more for chips manufactured using its most advanced manufacturing technologies, the company's revenue per chip for a part destined to be used in a high-end smartphone is higher than its revenue from a chip aimed at a midrange or low-end smartphone.
In effect, the slightly higher unit smartphone unit shipment growth that TSMC expects is set to be offset by a lower average selling price per smartphone chip due to a weaker product mix.
2. Not a lot of optimism for iPhone in 2018
Apple is easily TSMC's single largest high-end smartphone processor customer. The bulk of the iPhone processors shipped today are manufactured by TSMC (TSMC rival Samsung (OTC:SSNLF) manufactures a portion of the A9 processors found in the low-end iPhone SE and the iPhone 6s series devices).
On top of that, while Apple has relatively low market share within the overall smartphone market, it dominates the market for high-end/premium smartphones.
These factors mean that if TSMC isn't optimistic about overall high-end smartphone chip shipments, it's probably not expecting a huge year-over-year bump in processor demand from Apple.
Since TSMC's expectations are based on the feedback that it receives from its major customers, the company's pessimism around the high-end smartphone chip market could be driven by modest expectations from Apple itself.
3. Things stand to improve in 2019
The good news for TSMC is that its high-end smartphone chip sales stand to grow in 2019. Qualcomm (NASDAQ:QCOM), a major manufacturer of high-end smartphone processors, moved its high-end processor orders from TSMC to Samsung beginning in late 2015 and has stayed there since.
That move helped to bolster Samsung's chip manufacturing business at the expense of TSMC's.
However, Qualcomm has been widely rumored to be shifting its high-end processor orders back to TSMC for the processors that it'll likely announce at the end of 2018 for volume shipments throughout 2019.
If those rumors prove correct, TSMC could see a significant jump in its high-end smartphone processor manufacturing business in calendar year 2019.
The bad news, though, is that Qualcomm's shift from Samsung to TSMC is also rumored to be a one-generation deal. In that case, TSMC could enjoy a boost to its high-end chip manufacturing business in 2019 only to pare the gains in 2020.