Taiwan Semiconductor (TSM, Financial) has started to mass-produce new mobile processors for Apple (AAPL, Financial), reported Bloomberg. The new processor, named A12, is being manufactured using the latest 7nm process technology from Taiwan Semiconductor. This would lead to performance gains and power reduction for the new iPhone models. The first generation iPhone X is based on the 10nm process technology of Taiwan Semiconductors. Apple would be the first to use the 7nm technology in the mobile space.
Samsung (SSNLF, Financial) is likely to follow suit as the company is planning to use 7nm for mass producing mobile processors later this year. “It will begin using the new technique this year, in time for mass production for customers next year,” noted Bloomberg. Samsung said that it is ahead in the process node game. It is worth mentioning that Samsung’s 7nm process is arguably superior to its counterpart’s technology. Samsung has the ability to pack more transistors in a given space; transistor density for Samsung’s 7nm process is 127.3 MTr/mm2 as compared to 116.7 MTr/mm2 for TSMC.
Manufacturing costs are set to trend higher for Apple
With the use of latest process technology, manufacturing costs are expected to go up for Apple. Taiwan Semiconductors is not deploying Extreme Ultraviolet Lithography (EUV) – that eliminates the need for multi-patterning and reduces costs – during the first round of mass producing A12 processors. In short, cost of sales will go up for Apple until EUV is deployed.
High costs of 7nm might prove to be a headwind for Apple to some extent. However, increasing costs aren’t a material threat to Apple given the lack of direct competition for Apple’s iPhone. The company has a history of charging premium leveraging its strong design capability and branding. Nonetheless, margin will come under pressure if Apple decides to keep prices unchanged.
Cheap competition is gaining traction
Although Apple enjoys pricing freedom amid high brand recognition, cheaper phones with similar designs pose some threat. For instance, Huawei’s Honor series offer similar designs compared to Apple at a much lower price point. One could argue that Apple gets its premium because of its brand value, making cheap knock-offs a non-threat. But, design strategy has been a major factor in helping Apple to build its brand value. The point is that similar designs from recognized OEMs can take a toll on Apple’s iPhone sales going forward. Honor 10, an iPhone X doppelganger, had sold more than a million copies in China in just over a month. The phone was also sold-out in Europe within a day of its launch, according to some sources.
Design matters, and Apple might not be able to get the price it wants for its new phones given the success of cheaper phones with similar designs.
Samsung might have a cost advantage
For Samsung, it’s a different story at 7nm. Costs will be lower with a better performance if we are to believe the management. On one hand, higher transistor density at 7nm will translate into higher performance. On the other, the company has gained the ability to mass produce 7nm parts using EUV. Samsung managed to make more than 1,000 disks of silicon using EUV each day, according to the officials. This means that Samsung will avoid the costs of multi-patterning leading to relatively lower costs than Taiwan Semiconductor.
Unlike Apple, Samsung has to compete with myriad android Smartphone OEMs. Therefore, keeping the costs down is of utmost importance. Not only do the lower costs give Samsung an edge in the smartphone business, they can help the company gain more foundry customers.
What does this mean for AMD?
Advanced Micro Devices (AMD, Financial) is using Taiwan Semiconductor's services for the first round of its 7nm Ryzen processors. Given that Taiwan Semiconductor is busy with mass-producing Apple's order, AMD might have to wait. However, this is pure speculation at this point of time. Moreover, this is not expected to affect AMD's timeline as the company plans to mass-produce 7nm during 2019.
However, given Samsung's superior technology, AMD's processors built at GlobalFoundries might perform better in comparison to the ones produced at Taiwan Semiconductor Manufacturing. As AMD is up against Intel (INTC, Financial), it will need the performance bump to compete on equal footings. All in all, manufacturing at GlobalFoundries might prove to be the better choice for AMD.
Final thoughts
To review, Apple will probably be able to manage the increase in 7nm costs as it has the ability to charge premiums; the company has a loyal customer base. However, if OEMs like Huawei start to manufacture using Samsung’s foundry capabilities, it might be a problem for Apple’s iPhone sales going forward.
Samsung, on the other hand, will keep its smartphone lead amid lower costs and higher relative performance at the 7nm node. The problem lies with Taiwan Semiconductor as the company could lose business if Samsung’s process technology, in fact, proves to be superior.
Although AMD might have to wait to mass-produce the second generation Ryzen at TSMC, Samsung's superior transistor density is good news for the company.
Disclosure: I have no positions in any stocks mentioned and have no plans to initiate any positions within the next 72 hours.
