Apple is an American company. Its products are assembled in China (and now in India). But the
heart of the tech giant’s supply chain is in Taiwan. Five of the company's top ten electronic
equipment suppliers are in Taiwan, including arguably its two closest: Foxconn and TSMC.
Foxconn serves as one of several assembly partners within the Apple supply chain
alongside fellow Taiwanese companies Pegatron and Wistron. But there is only one TSMC. TSMC
is the sole supplier of one of the most important aspects of the Apple strategy: its semiconductors.
In this video I want to chronicle a beautiful relationship. One that made
Apple a trillion dollar company and put TSMC on the cutting edge of semiconductor manufacturing.
Steve Jobs unveiled Apple’s first custom semiconductor chip
in 2010 with the A4 in the first iPad.
Two years earlier, Apple acquired a fabless semiconductor firm called PA Semi
for $276 million, explaining that they wanted to design
system-on-chips for their devices. The Apple A4 was the first result of that effort.
That first Apple A4 chip was fabbed at Samsung Foundry.
Samsung had also provided the microprocessors for the first iPhone,
the 3G and the 3GS. They also provided several other critical components for the iPhone like the
screen. So it seemed logical that they take on the task of fabbing Apple's first custom-designed SOC.
But Samsung Electronic’s entry into the mobile phone industry chilled the relationship.
Things got colder when Apple sued Samsung for intellectual property theft.
No matter how much Samsung claimed that a “Chinese Wall” (whatever that means)
existed between the mobile phone and components division, Apple hated knowing that profits coming
to the Korean giant via its components business would be used to compete with it in mobile phones.
So Apple sought to diversify its supply chain. And that led it to TSMC,
which has a stated business principle of never competing with its customers.
On September 2014, Apple launched the iPhone 6's A8 processor - fabbed on TSMC's 20 nm process.
Both parties had been talking since 2010 when Jeff Williams and Morris Chang first dined together in
Taiwan. But it took several years to finally pull the trigger. With just one exception,
Apple has stayed with TSMC as its sole supplier.
Apple must have been anxious about the risks of single-sourcing its most critical component.
There have been a few news reports of them attempting to find a second supplier
for what they need. For the Apple A9, they tried to dual source from TSMC and Samsung.
A small brouhaha arose when the media alleged
that the Samsung chips had worse battery life than the TSMC ones.
Regardless of whether it was true (Apple said the differences in real life usage were negligible),
Apple stayed with single-sourcing for every Apple designed processor since.
## The relationship
Apple is a demanding customer. TSMC has gone to unusual lengths to accommodate the tech giant
and remain Apple’s exclusive chip foundry. I wanted to point out a couple of these.
The first is the staggering upfront financial and resource investment. Jeff Williams,
Apple COO, talks a little about this in his remarks at a gala honoring Morris Chang.
Few companies can afford this kind of financial commitment. SMIC, China Mainland's
leading foundry, raised $7.6 billion in its Shanghai IPO in 2020. TSMC spent $9 billion
on just one fab for just one customer. Samsung announced to great fanfare a 10 year $116 billion
plan for its foundry. TSMC will spend $16-17 billion in capital expenditure for 2020 alone.
The second is in how TSMC
had subtly crafted its entire R&D and tech rollout strategy to accommodate Apple's product rollout.
TSMC used to roll out a new node when it was done. See the early parts of this timeline.
Apple puts out a new iPhone every year. As a result they need a new,
better, and high-yielding chip process each and every year. The
foundry cannot miss on this annual cycle. It is the TSMC equivalent of Moore’s Law.
But it can be really difficult to consistently develop an entirely
new fab process on schedule. Intel tried it with its famous tick-tock strategy - where
it attempted to come up with a new node process roughly every 18 months to 2 years.
It worked ... until it didn’t and the American giant found itself stuck at 14nm for years.
To get around this, TSMC created a half step process strategy. They take an incremental
10-20% performance or power improvement each year, rather than a more ambitious jump
every two years a la Intel Tick-Tock.
Look at the A12 and the A13. The A12 is fabbed on the 7nm process (called N7).
7 nanometers (same as 14 nanometers) by the way
is a marketing term and is not correlated to any actual physical dimension on the chip,
which is why TSMC refers to it as N7, N7P, N5, etc on their calls.
The A13 is fabbed on the N7P - the next half step improvement on the N7.
The half process strategy allows TSMC to hone and refine its cutting edge technologies
step by step without unnecessary, large risks.
EUV for example, I talked a bit about in another video of mine.
When it came to using this unruly new technology, TSMC progressively dipped its toe
little by little, an approach different from those taken by Intel and Samsung.
It would allow them to be the first foundry to ship chips with full EUV at high yield in 2020.
This reliability, predictability and learning through iteration is
ultimately more important than shooting the moon on risky new technologies.
This methodology again is visible in TSMC's recently unveiled technology symposium. There,
they announced that their forthcoming N3 node - the next big step after the steps N5 (for the
A14 chip) and N5P (A15) - would not be using the next sexy revolutionary nano-technique,
something called Gate All Around or GAA.
The reason for this is clear. N3 will not be using GAA because Apple cannot afford
the risk of this technique failing to hit Apple's annual iPhone cycle.
## The reward
In return for all of this, Apple has richly rewarded the foundry.
Today, Apple is TSMC’s single biggest customer.
In 2019, Apple represented 23% of TSMC’s annual revenue - $8.2 billion of revenue.
Huawei, the infamous Chinese ... company,
is its second largest customer representing $5 billion in revenue.
Apple has put TSMC at the heart of the mobile ARM
revolution - supercharging its revenues and profits.
In 2020, TSMC celebrated 1 billion chips shipped with their 7nm process. To be able to create and
ship so many chips using a process that is just barely more than 2 years old. That is the value
of being able to sell to Apple and why TSMC shifted all of their processes to accommodate.
Such cutting edge node revenue also happens to be very profitable for TSMC as well. This
is in part due to that no other foundries are offering similar processes for a cheaper price.
An unappreciated fact in all of this (and a reason why TSMC has pushed harder for Apple than many of
their other customers) is that Apple is one of the few companies in the world that wants
and can afford to pay top dollar for chips made using cutting edge processes.
A TSMC 5nm wafer is estimated to cost $17,000 each. This wafer can be cut into
many little chips. If the yield is good, then each chip costs some $20-30 each.
For a $1000 phone, some $20 or $30 for a single but critical component is not significant.
Many of TSMC's other traditional customers like Mediatek or Qualcomm, on the other hand,
do not sell $1000 phones or even finished products. They sell chips and thus the cost of
the chip directly affects their profit. Samsung's cheaper prices will definitely catch their eye.
With Huawei no longer able to book orders with TSMC,
Apple is now unquestionably TSMC’s most important customer.
The recent news of them booking TSMC's entire N5 capacity makes it clear.
For now, the relationship seems secure and mutually beneficial.
For Apple, there’s no other legitimate substitute for what TSMC provides - and
they have tried. TSMC needs the money and revenue from Apple's titanic checks to keep
pushing the envelope on cutting edge technologies as advanced as anything that sent us to the Moon.
## Bonus question: will Apple buy TSMC?
This question ... oh God I can’t even believe that I have to say
something about it. But I keep seeing it on message boards and HackerNews.
No, Apple is not going to buy TSMC.
The ostensible reason why people think Apple should buy TSMC is because Apple as a company
likes vertical integration. They want to bring more things in-house. Yada yada yada.
Let me add a few reasons why in case it’s not exactly clear.
First, Apple doesn’t have the money. TSMC’s market capitalization as of right now
is $389 billion. TSMC is the ninth biggest company on the listed US stock market
right now by market cap. It’s about the size of Tesla, Visa or Nvidia right now. As of the last
earnings report, Apple has some $190 billion of cash on hand - but the company also has some $100
billion of debt - money it took out using that cash as collateral so that it can buy back stock.
Second, Apple has no value to add here. In fact, they are likely going to destroy it.
TSMC’s entire business model is to be a neutral third party that fabs your chips. They don’t
compete with their customers. Apple buying them would destroy this entire value proposition.
It would be setting on fire so much of the $450+ billion you just laid down to buy this company.
Last and most importantly, TSMC is Taiwan’s flagship company.
"Taiwan" is literally in the company's name. The Taiwanese government will block the transaction.
They will block the transaction even if the attempted buyer is American - a critical Taiwanese
ally. China has been trying to buy TSMC for years now to no avail. Why would an American succeed?
The fact is, Taiwan sees TSMC as the crown jewel of its economy. By itself, the company represents
some 50% of the nation's entire R&D spend. Selling it off would spark an uproar and political heads
will roll (the story of ARM not withstanding). Control is not for sale at any price.