Apple (AAPL 0.02%) sells hundreds of millions of devices each year. For those supplying parts or services necessary to get those devices into consumers' hands, winning Apple's business is a huge deal. Some suppliers depend on Apple so heavily that they have no choice but to bow down to Apple's demands, especially if competitors are gunning for the same business.
Taiwan Semiconductor Manufacturing (TSM -3.60%) may be the only Apple supplier where the script is flipped. Apple depends on TSMC to manufacture its custom chips, and TSMC generated around 26% of its total revenue last year from its largest customer, which is presumably Apple. In theory, Apple should have some leverage in pricing negotiations.
TSMC has all the power
The problem is that TSMC is pretty much the only game in town, at least when it comes to manufacturing the most advanced chips. More than half of semiconductors manufactured by third-party foundries come from TSMC, and the company has pulled away in terms of manufacturing technology. TSMC's manufacturing prowess is partly responsible for the incredible performance and efficiency of Apple's chips.
TSMC is reportedly seeking pricing increases for 2023, according to Chinese website The Economic Daily. Prices for 8-inch wafers will be boosted by 6%, while prices for 12-inch wafers will go up by between 3% and 5%. Apple is reportedly going to pay those higher prices after TSMC stood firm on its pricing demands.
This is a situation that's ripe for disruption. If a viable alternative were to emerge, Apple and other large TSMC customers would gain some leverage and no longer be entirely dependent on TSMC. This is where Intel (INTC -0.39%) comes in. The chip company is pouring tens of billions of dollars into its manufacturing arm as it builds out its own foundry business.
This effort will take years to bear significant fruit, and Intel will need to win the trust of foundry customers who looked on as the company struggled with manufacturing setbacks over the past few years. Intel will also need to catch up with TSMC on the technology front. The company had an undisputed manufacturing lead for many years, but that lead has slipped away.
Intel's enormous opportunity
Intel's core business is still making CPUs for PCs and servers, and that's not going to change anytime soon. But more than $80 billion is spent at third-party foundries annually, and that number will rise over time as semiconductors find their way into more devices and products. Over the long run, Intel's foundry business has the potential to become a significant portion of its total revenue.
This is the bull case for Intel. There are very few companies capable of building a foundry business that rivals TSMC's, both in terms of expertise and capital. The payoff will be enormous if Intel gets it right.
Intel also has one big advantage: It's a U.S.-based manufacturer. It's building a mega-fab in Ohio, and it's investing in new facilities in Europe. TSMC is working on a U.S. foundry, but the company is based in Taiwan, which is caught in the middle of increasingly contentious relations between the U.S. and China. There's a chance China will invade Taiwan at some point. It's in the best interests of large TSMC customers to seek alternatives, and Intel is looking to play that role.
Right now, as demand for semiconductors takes a hit as sales of PCs, graphics cards, and other products slump, spending billions on more manufacturing capacity may not look like the best idea. But Intel is playing the long game. If those investments pay off, Intel stock could be one of the biggest winners in the semiconductor industry over the next decade.
