Say hello to what likely appears to be one of the newest direct Apple (NASDAQ:AAPL) suppliers: Taiwan Semiconductor (NYSE:TSM). A smartphone or a tablet contains a ton of chips, so Taiwan Semiconductor has likely been an indirect supplier to Apple for quite some time. But with the upcoming A8 chip, TSMC will likely get most, if not all, of Apple's A-series processor business. What does this mean for TSMC?
Is Samsung in or out?
The idea that Apple has wanted to move away from Samsung (NASDAQOTH: SSNLF) is not new. Given the tumultuous relationship between Apple and Samsung, it's probably true to some degree. Apple likely wants multiple sources, longer-term, to drive competition among the foundries and to minimize risk. But the word that has been circulating on the web has been that Samsung's 20-nanometer yields are so bad that it is pulling out of the A8 supply chain.
Why is this important? The Apple business is quite large, and there is a material financial difference between having 60-70% of the orders and 100% of the orders. So, let's look at the two cases separately -- the case where TSMC gets 70% of the business, and the one where TSMC gets 100%.
There are a few base assumptions that we need to make in order to do a more detailed financial analysis of what's going on here. Assuming that Apple sells about 100 million of its highest-end iPhones with the latest A8 chip and then about another 50 million iPads with the A8, this would translate into roughly 150 million leading-edge chips needed over that 12-month life cycle. Assuming, then, that each chip can generate roughly $15 per unit for the foundry, this means a total business worth $2.25 billion -- the A7 allegedly costs $17.50, and roughly 70% of that cost is the actual silicon, so assume a roughly 22% increase for 20nm.
If TSMC has 70% of the business, then this translates into incremental revenue of about $1.5 billion, and at 100%, it gets the full $2.25 billion. Over the longer term, as TSMC products waterfall into older-generation iPhones, its total A-chip units will increase, although the blended ASP will come down. That said, for a company that did $20.11 billion in 2013, an incremental $1.5 billion-$2.25 billion is a nice piece of business, but nothing that will cause a dramatic gap up in sales.
Foolish bottom line
The Apple business would be a nice addition to TSMC's already-thriving business, but nothing that's necessarily a "game changer" that would lead to a dramatic upward repricing. Losing Apple's business on Samsung's part -- remember, Samsung does about $180 billion per year -- wouldn't really move the needle either way, given the meteoric growth that Samsung is seeing in smartphones and tablets, as well as in DRAM. That said, it'll be very interesting to see how this all plays out over the next year.