During and following its most recent earnings report, Taiwan Semiconductor (NYSE:TSM) talked up a fairly big game with respect to both its semiconductor technology and its superiority as a contract chip manufacturer. In particular, TSMC has been outright bad-mouthing both Samsung (OTC:SSNLF) and Intel (NASDAQ:INTC), claiming that its technology is superior, the products built within its factories are superior, and that its service is unmatched. How can investors know if this is legitimate, or it's just marketing?
It's all about Apple, baby
Apple (NASDAQ:AAPL) is arguably the world's most important smartphone/tablet vendor, and this behemoth requires a lot of chips. In particular, the company designs its own applications processors for its iPhone/iPad products in a bid to marry hardware and software in a way that very few can match. However, while Apple is all about great chip designs, it does not own or operate its own chip-building factories.
This means that Apple needs to have these supplied. Apple's choices for leading-edge technology are the following:
- Taiwan Semiconductor
- Global Foundries
Since the beginning of the iPhone, Apple has relied on Samsung exclusively to build its A-series chips. However, it's important to note that Samsung has also arisen as Apple's most aggressive competitor in the smartphone market by a fairly substantial margin. Enabling Samsung financially and giving it access to Apple's unique silicon designs seems like a pretty bad plan. Apple is very likely to want a neutral, independent foundry.
If TSMC doesn't win this contract, it will discredit TSMC
Many were shocked to find that in the iPhone 5s, Samsung had, yet again, won the Apple foundry work. This is particularly interesting given that the rumors had been swirling for quite some time that Apple was going to move to TSMC as quickly as possible.
The real test of TSMC's claims of foundry superiority will be with Apple's next-generation A8 chip. If TSMC is really true to its word of being superior to its competition, then Apple will have chosen TSMC for the manufacture of its next-generation chips. This will be a critical thing to watch. If TSMC again finds itself not having built the applications processor for Apple, and if Samsung -- Apple's arch-enemy -- wins this business again, then investors will need to ask some serious questions.
What about Intel?
Intel has talked up its prospects as a foundry a lot lately. While Intel's manufacturing technology is superior to TSMC's, it's difficult to escape the fact that Intel is a classic "frenemy." On one hand, Intel is a great supplier of chips to Apple for its Mac products, but on the other, Intel is working to actively enable Apple's Android competitors with its own Atom products. There are rumors that Apple is actively looking to boot Intel out of the Mac -- although, you should take these with a grain of salt.
While Intel's manufacturing technology is impressive, there are some real hurdles to this kind of a deal. First, Intel is still new to foundry. Next, Apple could leverage Intel's manufacturing technology to make chips for the Mac that could be even better than Intel's for that particular purpose. Finally, Intel's pricing is likely to be at a premium to TSMC's, suggesting that Apple would take a gross-margin hit in the name of performance/power improvements.
Foolish bottom line
Watch the Chipworks teardowns that follow once the next-generation iPhone is released. If these products are built on TSMC's process, then there may very well be something to the chipmaker's claims of foundry superiority. If they're still built on Samsung, or if -- gasp! -- they're built at Intel, then investors should take the company's future claims with a healthy dose of skepticism.