Apple, Inc. or Qualcomm: Who Matters More to Taiwan Semiconductor?

Let's dive in!

Ashraf Eassa
Ashraf Eassa
Jul 15, 2014 at 9:32AM
Technology and Telecom

As far as mobile applications processors go, Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) are the two largest vendors by volume. According to research firm Strategy Analytics, Apple held approximately 16% of the smartphone processor market share while Qualcomm held a whopping 53% of the market. A question that naturally arises is whether Apple or Qualcomm is more important to semiconductor manufacturing powerhouse, Taiwan Semiconductor (NYSE:TSM)

It's not an obvious answer
If you look at the market share numbers provided, then the answer may seem intuitively obvious -- Qualcomm has over three times the market share! But there's a pretty important subtlety here that can't be ignored. Remember that while Qualcomm sells apps processors into a wide spectrum of devices -- from $149 smartphones to $600-plus "hero" phones -- Apple is almost exclusively selling midrange to high-end devices. 

This distinction is important because the "tier" of smartphone sold has a direct impact on what kind of manufacturng technology that the chips are built on. Taiwan Semiconductor could conceivably value a customer that uses more bleeding-edge technologies (and is willing to pay more for the early run of said wafers) more so than a company whose mix is more dominated by the low end. 

Apple brings a lot of leading edge to the table
If you look at the smartphone market, the high end is more or less dominated by Apple and Samsung (NASDAQOTH: SSNLF), with Apple having majority share of that high end. Right now Samsung is the sole chip manufacturer to Apple, which has been the big driver of Samsung's foundry business. 

Interestingly enough, Samsung's high-end smartphones -- the Galaxy S and Galaxy Note -- typically feature Qualcomm-designed, TSMC-built Snapdragon chips (though the international variants often pack Samsung's Exynos -- built in Samsung's own chip factories). 

Since the leading iPhone models tend to dramatically outsell the corresponding Samsung Galaxy phones, if TSMC is able to get most -- if not all -- of Apple's chip manufacturing business, then it will more-or-less dominate the market for high-end smartphone silicon. 

In fact, if TSMC did just a straight swap of Qualcomm's high-end business for the entirety of Apple's chip business, then TSMC would still probably come out ahead. Apple is that important as a high-end foundry client. 

Qualcomm is important, too
Despite Qualcomm's likely lower volumes at the bleeding edge of the smartphone market, it does still command the majority of the smartphone chip market. Volume is important in driving manufacturing scale (to amortize the large and rising costs of factories and R&D), so TSMC can't really afford to let Qualcomm slip through the cracks in a broader sense.

The bad news for TSMC is that at the 28-nanometer manufacturing technology -- which is likely to dominate Qualcomm's mix for years to come -- more competition is swarming on in. The good news, though, is that TSMC has been shipping 28-nanometer silicon for far longer than anybody else in the industry so it wouldn't be too farfetched to believe that its wafer cost structure is better and that the performance/yields of its products are better, too. 

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Foolish bottom line
At the end of the day, Qualcomm is very important to TSMC as it still drives the majority of its mobile chip volumes/revenues and will likely continue to do so. But Apple is potentially going to be a larger consumer of leading-edge wafers and going forward. Both very important, but important in different ways.