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Apple Gives the iPhone to TSMC -- For Now

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For years Samsung was the sole supplier of the silicon that powers Apple's post-PC gadgets; now it appears that both TSMC and Samsung will supply the next generation of A-series processors.

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The Wall Street Journal reports this morning that Taiwan Semiconductor (NYSE:TSM) has begun shipping microprocessors to Apple (NASDAQ:AAPL) in preparation for a fall iPhone launch. For years Samsung (OTCMKTS:SSNLF) was the sole supplier of the silicon that powers Apple's post-PC gadgets; rumors of a split with Samsung first surfaced last summer, and it now appears that both TSMC and Samsung will supply the next generation of A-series processors. Apple has similarly hedged its bets with Foxconn (TPE:2354), the primary assembler of the iPhone, and siphoned off business to other Asian-based competitors including Pegatron (TPE:4938).
 
Widening the supply chain makes sense given the rivalry between Samsung and Apple, and the supply issues that have haunted past models of the iPhone. However, it also complicates things, and nowhere is this more apparent than in the semiconductor industry. Designing a processor is the easy part. Implementing one can require years of collaboration between designers like Apple and Qualcomm (NASDAQ:QCOM), and foundries like TSMC. Chip giant Intel (NASDAQ:INTC) recently opened its doors for third-party business, and CEO Brian Krzanich described the time frame as "18 to 24 months before first silicon and probably 30 to 36 months before... any volume."
 
Different foundries come with different IP, different manufacturing processes, even different sizes. At the moment, TSMC and Samsung both print chips using 20nm technology, making life easier for customers; but Samsung's next node will be 14nm versus TSMC's 16nm. Apple will have to either choose one over the other or split the A-series processors into two lines -- and then the iPhone-maker is back at square one, with little flexibility or choice between whom it buys from.
 
Perhaps the biggest complicating factor is how different Apple is from the rest of the industry. Chip designers tend to design a lot of chips, and chipmakers tend to produce a variety of designs. Apple sells hundreds of millions of the same thing. For years, Apple sidestepped this mismatch by pursuing long-term, monogamous relationships with suppliers; but one way or another, the iPhone's success has effectively killed those partnerships.
 
The critical thing to watch this fall won't be the iPhone's sales numbers -- or at least, not just that -- but the ability of Apple's increasingly fragmented supply chain to continue providing the consistency and quality the company is known for. From here on out, things only get tougher.
 
No positions in stocks mentioned.
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