According to industry insiders mobile chip maker broke the news, Apple has officially rejected TSMC’s request for a price increase in 2023, it looks like Apple is stronger than TSMC. Apple has invested in a large number of products at TSMC, including 4nm A16 processors, 5nm A15/M1/M2, etc. Apple’s clear rejection of TSMC is a dark war over supply chain dominance.
We know that Apple has always been a dual supply chain model, that is, for the production of any key components, there are two suppliers for Apple to choose from, once one of them does not meet expectations or seeks pricing power, Apple chooses another to check and balance, firmly control the bargaining power.
But Apple will not deliberately to squeeze the profits of suppliers, after all, suppliers need to have reasonable profits to improve the process and technical standards. In the past, there are generally requests for price increases from suppliers, and if the requests are reasonable, Apple will meet them, for example, in the past, because Foxconn Zhengzhou labor costs increased, Apple directly gave Foxconn OEM price increases, bearing the cost of this part. But for unreasonable requirements, Apple will clearly refuse.
TSMC’s price increase has its reasons because due to various factors in recent years, the chip foundry costs have risen significantly, in order to maintain the normal operation of the enterprise, TSMC had to raise the price of chips.
In fact, TSMC also knows that Apple is a major customer, can not be offended, chose to treat Apple differently after TSMC had announced that the chip foundry prices rose 10%-20%. But only the Apple A-series processor foundry prices rose by about 3%, much lower than the TSMC to other chip increases.
Apple and TSMC pricing dominance battle fought
In Apple’s view, TSMC may be seeking pricing dominance. As mentioned earlier, most of Apple’s components are basically supplied by two or more companies together, allowing these companies to compete with each other to keep costs down and, if necessary, remove and replace one of them to train new manufacturers to join.
However, in the field of chip foundry, there is only one TSMC, therefore, the irreplaceability of TSMC is very obvious, and Apple has vaguely felt the crisis of TSMC’s pricing dominance.
In fact, in the past, Foxconn used to put such pressure on Apple, and as the irreplaceability of Foxconn alone grew, around 2016, Foxconn no longer accepted Apple’s terms very easily, as it did before.
At that time Apple began to ask suppliers to offer a 20% reduction, which was opposed by Foxconn, while Foxconn Group companies argued that such a price was unacceptable and said that if there was no reasonable profit will not accept Apple orders.
What did Apple do later? Apple divided the orders among several other major foundries such as PEGATRON, Lixin Precision, and Wistron, and continued to support the growth of other foundries.
Today, Lite-On Precision continues to grow and grow, with its foundry products gradually upgrading from sound, optical and electrical components to AirPods headphones complete machines, and in 2020 spent 3.3 billion yuan to acquire two subsidiaries of Wistron, gaining the key iPhone complete machine foundry business.
Now as Lixson Precision goes all the way up, the substitution effect on Foxconn is getting stronger and stronger. This year, there is news that Lixson Precision took 40% of the orders for iPhone 13 Pro, and the other 60% of the orders are contracted by Foxconn.
Compared to the past, Foxconn’s order share and bargaining power has been continuously weakened. Foxconn is obviously much more obedient than in the past.
But TSMC is not Foxconn. TSMC’s technical strength and irreplaceability is also far more than Foxconn. In fact, Apple certainly has Samsung to choose from, but there is still a gap between Samsung’s process and TSMC’s process.
However, it is because of TSMC’s irreplaceability that Apple has felt the crisis and started to check and balance by cutting orders as well as rejecting TSMC. For example, in July this year, Apple, Nvidia and AMD’s three core customers cut TSMC orders, of which, Apple, the largest customer, cut 10%, and since then, the news said that because Apple’s first project based on the N3 process, Ibiza, in terms of performance Apple has abandoned TSMC’s N3 process because it is not satisfied with the performance of its first project based on the N3 process.
From cutting orders to abandoning TSMC’s N3 process to explicitly rejecting TSMC’s request for a price increase, Apple’s deep-seated conflict with TSMC seems to be uncovered.
Apple’s previous A16, A17, M2 series chips have been scheduled TSMC 4nm, 3nm a large number of capacity, in the absence of forewarning, TSMC forced price increases, which undoubtedly makes Apple quite dissatisfied, Apple will take this opportunity to share part of the order to Samsung, the formation of a dual supply chain system in the field of chip foundry, is not known.
Samsung has the most power to check TSMC. As early as June 30 this year, Samsung Electronics announced the mass production of 3nm chips! According to Samsung’s official website, the 3nm chip compared to the previous 5nm chip, performance increased by 23%, power consumption was reduced by 45%, and the chip area was reduced by 16%.
In the latest 3nm battle, Samsung is using a more advanced MBCFET (around the gate field effect transistor) technology, while TSMC is using the more backward FinFET technology. TSMC is likely to lag behind the other side in the process for the first time. But because Samsung did not disclose the yield, let people guess that Samsung may not be optimized in the yield, in general, TSMC may once again face Samsung’s strong snatch and competition.
Therefore, from Samsung’s breakthrough and strength in 3nm, Samsung Apple again the possibility of cooperation becomes greater.
TSMC thinks it has a more advanced process after the process, which Apple Qualcomm will certainly use. But did not think, with or without, is their say, not TSMC says it.
TSMC is in an awkward dilemma
Apple also has difficulties, from today’s point of view, the overall smartphone market is moving into a downward trend, from this year’s consumer market, due to the repeated epidemic and the economic downturn, the consumer end of the consumer perception began to rationalize, the market consumer confidence low.
Many people are tight and dare not spend money indiscriminately, coupled with the current slowdown in global economic growth, consumers’ desire to switch to a lower machine, Apple’s rare 1% drop in Greater China in the third fiscal quarter, the current iPhone 14 series sales are also less than expected, the current news that Zhengzhou Foxconn has dismantled the iPhone 14 part of the production line.
Therefore, based on the iPhone 13 series over-selling, as well as the longer replacement cycle, iPhone 14 sales decline may be a probable event, Apple in order to ensure profits, from the supply chain link for their own outflow of some profits may become a kind of Apple’s demand.
After all, Samsung for so many years has been trying to fight for Apple A series chip foundry opportunities, if Apple will leave this opportunity to Samsung, Samsung can undoubtedly accept lower foundry prices, due to Apple’s own demand, the chip foundry cost reduction will save Apple a lot of profits.
TSMC will be increasingly embarrassed, in the past, TSMC also has Huawei, a large customer, from potential, Huawei’s order potential growth is very large, and can form a counterweight to Apple, but unfortunately, because of well-known reasons, was removed from the list of customers of TSMC. But from the current point of view, once Apple orders to Samsung, TSMC is not able to replace Apple’s new customers, a large number of EUV may stop work, which is not a result TSMC can afford.
Therefore, in the case of Apple’s strong demand for price increases, TSMC may choose to negotiate further with Apple, but the possibility of Apple backing down is very small, from the personality and strength of both sides, the outcome of this game to TSMC compromise is more likely to end.
However, it is still difficult to conclude, after all, TSMC is also not willing to be suppressed by Apple its pricing power. If Apple chooses Samsung, it may not be able to achieve TSMC’s process performance and effect, from the past, Samsung foundry two generations of Snapdragon flagship chip heat is too hot, and market reputation and performance experience does not allow consumers to be satisfied.
Therefore, it may now come to the critical moment of the game, if TSMC chooses to harden Apple, Apple does not compromise, TSMC is difficult to step down, in the long run, Apple’s orders are bound to divert a portion to other competitors, may also give Apple a strong reason to support the Samsung foundry.
If the price does not rise, TSMC is difficult to stay for their own profits, TSMC has invested a lot of research and development costs at the level of process development, if the profits are not enough, it is difficult to have sustained motivation and research and development funds to continue to promote the chip process progress.
There are also industry insiders who say that the only way to have a chance of survival is to stiffen Apple, and if it goes soft, it will become an Apple pawn.
Apple and TSMC this bargaining power game will go where, there is still to see, but in general, TSMC is caught in a dilemma. If both sides refuse to compromise, it will be the end of a thousand wounded enemies and 800 self-inflicted damage. This may be a greater test of TSMC’s wisdom, but also TSMC’s past practices have led to their own customer circle is getting smaller and smaller, and the bitter fruit has long been planted.
Today, TSMC’s core high-end customers are almost those few American giants – Apple, Qualcomm, Nvidia, AMD, etc.. Once these major customers have other options based on their own interests or have other ideas, TSMC’s orders and profits will face an unstable situation, Apple from cutting orders to abandoning TSMC’s N3 process and then explicitly rejecting TSMC’s request for price increases is in fact a dangerous signal, today TSMC’s embarrassing position, perhaps worth it deep reflection.
