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No, You Shouldn't Expect an Apple Inc. iPhone 7 Shortage

By Ashraf Eassa – Feb 16, 2016 at 10:25AM

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A refutation of an argument put forth by BGR.

It is well-known that there was recently a fairly significant earthquake in southern Taiwan, which affected -- among a number of Taiwan-based component vendors -- Taiwan Semiconductor Manufacturing Company (TSM -2.33%).

According to DIGITIMES, TSMC said that as a result of the earthquake, its wafer shipments would be down more than 1% as a result of the damage in the first quarter of 2016. Not an insignificant impact, but certainly not the sort of thing that drives widespread industry panic.

Despite this, BGR published an article in which the author suggests that supply of Apple (AAPL -1.51%) A10 processor -- for the iPhone that's expected to launch in September 2017 -- might be tight, causing something of a shortage in iPhone 7/7 Plus suppliers.

I do not believe that it is reasonable to expect this earthquake to impact iPhone 7 supplies in the slightest. Allow me to explain.

Some industry basics
Generally speaking, it takes time to build up a sufficient number of chips to support a major launch such as the iPhone's. From blank wafer in to fully processed wafer out of the fab usually takes around three months (known as cycle time). And add in a little more time for the chips from these wafers to be packaged and tested.

TSMC has indicated in the past that it takes about 1.5 quarters to go from production start to revenue recognition for its wafers. In order to support a September iPhone launch with ample volume, I wouldn't expect production to begin on the A10 until around April, with wafers rolling off the line in June.

Based on this analysis, I would expect iPhone 7 builds to begin in the June time frame, which should give the iDevice maker about three months to build up the millions of phones that will be required at launch time.

Is it obvious now that the earthquake won't impact iPhone 7?
Even if TSMC expects to see its wafer shipments drop by 1% in the first quarter of 2016, it should be obvious at this point that this will have no impact on iPhone 7/7 Plus. Production of the chips that will go into the next iPhone probably won't even start for a few more months, and by then I would expect TSMC to patch up the damage that was done to its equipment.

Remember that the wafer shipment impact is only said to show up in the first quarter, not for the entirety of 2016. I doubt that TSMC will see a material impact to wafer shipments beyond the first quarter of the year.

The interesting lesson from this earthquake
Although this earthquake is unlikely to impact Apple or the iPhone 7, Taiwan is country that is prone to earthquakes. And, for better or worse, all of TSMC's chip manufacturing plants are in Taiwan.

I suspect that some of TSMC's high-profile customers would appreciate it if TSMC were to build out leading edge capacity elsewhere in the world, perhaps in the United States. Indeed, TSMC rival Samsung (NASDAQOTH: SSNLF) has capacity both in its home country of South Korea as well as in the United States.

Doing so could make it less risky for major customers, such as Apple, to choose TSMC as a sole source, as it is said to be doing with the A10.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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