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Here's the Next Battle in the iOS Versus Android War

By Jamal Carnette, CFA - Nov 18, 2015 at 10:00AM

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Are suppliers the next battleground in the iOS versus Android war?

Qualcomm's new Snapdragon chip brings good news for Samsung. Source: Qualcomm

Although more is written about the assembled devices -- tablets, smartphones, and personal computers -- perhaps the most intense battles in technology go on behind the scenes. And that's because winning a spot in a highly popular gadget can make -- or losing a spot can break -- suppliers and manufacturers due to customer concentration. Simply put, being a tech-focused supplier is rife with risks.

There are more reasons the nature of the semi-finished goods supplier is inherently more risky than the finished goods purveyor. Not only are you at the whims of the buyer, which is carefully watching costs and evaluating quotes from your competition, but you are also at the whims of the end consumer, which may or may not buy the end product, making the other risks moot.

However, there are reasons to like the industry. For those looking to do their homework, suppliers can be more mispriced due to lack of focus and coverage. Not only that, smaller suppliers are more likely to be acquired at a premium as a large company seeks to "in-house" some of the production processes.

With that in mind, it's always good for technology-focused investors to follow the happenings in the supplier industry. And perhaps the most-important supplier for the smartphone industry is the system-on-a-chip CPU maker and supplier. And it seems Samsung (NASDAQOTH: SSNLF) and Taiwan Semiconductor Manufacturing (TSM 0.63%) are quickly becoming the next iOS versus Android battleground.

Is Apple no longer dual sourcing?
Earlier this year, Apple continued its policy of dual-sourcing the fabrication (read: manufacturing) for its A9 iPhone chip from both Taiwan Semiconductor Manufacturing and Samsung. However, unlike its A8 predecessor, the company had an added wrinkle: The process technology would be different. For iPhones sporting chips manufactured at Samsung's foundries, the chip is of the 14-nanometer variety while chips from Taiwan Semiconductor are equipped at 16-nanometers.

Although generally chip size lower is better, it does not seem to be the case here. Recently there's been a few tests stating iPhones with Samsung fabbed chips actually run hotter and have up to 22% worse battery life than TSMC's. Apple's since pushed back on these rumors, but a new rumor that Apple's going all-in with TSMC as the fabricator for the next-gen A10 chip makes me believe where there's heat, there's fire.

To be fair to Samsung, Apple's relationship with Samsung as a fabricator was always a little odd, considering it is also its largest finished-product competitor, and that could be the reason for Apple to switch to TSMC. Regardless of the reason why, however, it seems Samsung is out of Apple's chip fabrication for at least one year.

Meanwhile, Samsung and Qualcomm get cozier
After much speculation, Qualcomm (QCOM 0.79%) finally unveiled its flagship Snapdragon 820 chip. Although it was reported before, the company made it official that it was going with the 14-nanometer process -- right now Samsung is the largest-scale foundry (excluding Intel) available to do this, and seemingly verifies an earlier report from Recode that Qualcomm would use Samsung for fabrication, moving away from Taiwan Semiconductor Manufacturing.

Interestingly enough, and insight into the weird world of tech where a supplier can also be a customer, other reports are Samsung is looking to return to Qualcomm's flagship chip in the next-gen Galaxy S7 unit after equipping its current-gen Galaxy S6 model with its own Exnos chipset amid concerns the previous-gen Snapdragon 810 was prone to overheating. And that makes sense, as Qualcomm's Snapdragon line of processors are nearly standard in high-end Android-based units.

Perhaps the odd man out by this new partnership is Taiwan Semiconductor, which by all accounts fabricates an amazing chip, it's just not at the 14-nanometer process. For Samsung, the company mentioned its 14-nanometer process as a source of growth in the upcoming quarters, and it seems like Qualcomm is on board.

More broadly, however, it seems as if suppliers -- at least chip fabricators -- are at risk of becoming the next group of stakeholders to take (or be forced to take) sides in the iOS versus Android battle.

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Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
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Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
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