We all know breaking up is hard to do, but in the case of tech titans Apple (AAPL +0.11%) and Samsung (NASDAQOTH: SSNLF), their painful, multiyear split appears to be entering its final stages.
Years ago when it had only recently introduced its iPhone (2007) and iPads (2010), Apple leaned heavily on Samsung as a critical supplier of the technological innards like displays screens, memory chips, and application processors that brought its iDevices to life. But after duking it out more recently in courtrooms around the world, Apple has slowly worked to detach itself from Samsung's components.
Last year, Apple dealt what many analysts heralded as the beginning of the end of the Apple-Samsung relationship when it inked a widely anticipated deal with semiconductor fabrication powerhouse Taiwan Semiconductor (TSM 0.83%) to funnel away construction of Apple's A-series chips from Samsung, the final component for which Samsung remained a significant supplier for Apple. Fast forward to today and it appears that Taiwan Semiconductor has finally begun to actually produce Apple's A8 chip for the upcoming iPhone 6.
Samsung set to feel the pain
Apple and Taiwan Semiconductor inked their deal last year. But Samsung likely remained the sole supplier of Apple's A-series chips until these recent reports surfaced, which implies Samsung will only now begin to see actual revenue declines related to Apple's now-dwindling chip orders. But just how much and how quickly Apple will be able to shift its chip-making business away from Samsung is a matter of debate.
Analysts believe that Apple will account for roughly 10% of Taiwan Semiconductors FY 2014 revenue. The current ballpark estimate for Taiwan Semiconductor's full-year revenue sits at $23.6 billion, which implies Apple-related revenue of $2.36 billion.
Apple's component contract is estimated to have generated about $10 billion in sales for Samsung last year, so we're talking only talking about a 24% decline in Apple-related business this year. All told this is a drop in the bucket considering Samsung's massive revenue base. But this revenue shift comes at a highly inopportune time for Samsung as it grapples with declining revenues in its massive smartphone division as well. Recently, Samsung warned investors that profits were likely to decline 24% in its most recent quarter.
The beginning of a beautiful friendship
Although it's not clear how long it will take for Taiwan Semiconductor to be able to manufacture the entirety of Apple's A-series lineup, if ever. Apple is a notoriously demanding customer, as several Taiwan Semiconductor employees noted in a recent article in The Wall Street Journal.
But the prospect of the financial windfall Apple could provide Taiwan Semiconductor, while also enabling Apple the twist the proverbial knife against Samsung, means both parties will be motivated to shift as much of Apple's semiconductor spending toward Taiwan Semi as is humanly possible. According to those same reports, Apple and Taiwan Semiconductor are well under way in developing a new 16 nanometer manufacturing process that's intended for what's presumably Apple's A9 application processor next year, so it's clear both companies are thinking long term with this partnership.
But his deal isn't without risks for either party. In shifting the bulk of its application processor fabrication to Taiwan Semiconductor, Apple is placing a huge amount of faith in Taiwan Semiconductor's ability to produce Apple's highly complex chip designs at Apple's massive scale, something that few companies have the technical know-how to accomplish. We've also seen how exacting a customer Apple has been for companies that become overly reliant on Apple's business (case in point Cirrus Logic).
At the end of the day, however, the deal between Apple and Taiwan Semi makes too simply presents too enticing an opportunity for both parties not to see it through as much as possible.
