One Apple (AAPL +2.65%) supplier that investors should pay close attention to is Taiwan Semiconductor Manufacturing Company (TSM +1.97%), or TSMC for short. TSMC is the world's largest contract chip manufacturer and builds a broad range of chips for a diverse set of customers. Apple, of course, is arguably TSMC's highest-profile customer.
TSMC first began manufacturing Apple's A-series processors in 2014. It was, after all, the sole producer of the A8 processor inside of the iPhone 6-series smartphones. TSMC, however, wasn't the sole producer of the follow-on chip, known as the A9 -- both TSMC and Samsung were tasked with building that one.
Image source: Apple.
TSMC struck back, though, and managed to win every subsequent A-series chip manufacturing contract. It was the sole producer of the A10 Fusion and A11 Bionic, and is the sole manufacturer of the A12 Bionic. (Apple said that the chip is manufactured on a 7nm technology and TSMC is the only company currently mass producing 7nm chips.)
How will TSMC see its A-series market share increase as a result of Apple's newly announced smartphone lineup?
iPhone 6s bumped away
Apple generally keeps its smartphones around for multiple generations as progressively lower-cost options. This strategy is simple, but effective, as the manufacturing costs of an iPhone tend to go down over time as manufacturing processes mature and suppliers reduce prices on older components. The iPhone 6s, for example, was discounted with the introduction of the iPhone 7-series in 2016, and it was discounted further when the iPhone 8-series and iPhone X launched in 2017.
Near the end of Apple's product launch keynote on Sept. 12, the company announced that its new iPhone product stack would consist of the following products (I've put the processor that powers each phone in parentheses next to the phone name):
- iPhone Xs Max (A12 Bionic)
- iPhone Xs (A12 Bionic)
- iPhone Xr (A12 Bionic)
- iPhone 8 (A11 Bionic)
- iPhone 7 (A10 Fusion)
This seems to suggest that Apple is no longer selling the A9-powered iPhone 6s-series of smartphones or the 4-inch iPhone SE, for that matter. (To be sure, I checked Apple's website and it doesn't seem that I'm able to buy either device.)
What this ultimately means, then, is that TSMC's share of the A-series applications processor orders should increase further over the current product cycle, while Samsung's should continue to decline.
TSMC expecting 7nm to be huge
During TSMC's July 19 earnings conference call, management said that it expects 7nm shipments "to jump to more than 10% of our wafer revenue in [the] third quarter and is estimated to contribute more than 20% revenue for us in the fourth quarter in this year." It's not hard to see why TSMC is so bullish on the ramp rate of its 7nm technology given that Apple is using the technology in its newly announced iPhones.
TSMC CFO Lora Ho also told investors that the company expects revenue from its 7nm technology to make up "more than 20%" of the company's wafer revenue for the entirety of 2019.
This makes sense, as Apple will ship 7nm products throughout the entirety of next year. At the same time, Apple should be buying far fewer 10nm chips than it did in 2018, and many other non-Apple products should ramp up using the technology, too. In fact, TSMC claims that it's expecting "a total of more than 50 customer product tape-outs by the end of this year from a wide range of applications covering mobile, server CPU, network processor, gaming, GPU, FPGA, cryptocurrency, automotive and [artificial intelligence]."
