How Apple Changed TSMC

Summary

This video explores the intricate relationship between Apple and TSMC, focusing on how TSMC became Apple's exclusive semiconductor supplier. It traces the history of Apple’s shift from Samsung to TSMC, driven by competition and intellectual property disputes, and highlights TSMC's strategic innovations to meet Apple's demanding product cycles. The video also discusses the financial investments and R&D efforts required to sustain this partnership, as well as TSMC's vital role in Apple's success, while dispelling rumors about Apple potentially acquiring TSMC.

Takeaways

• 🍎 Apple's supply chain is heavily reliant on Taiwan, with five of its top ten electronic equipment suppliers based there, including Foxconn and TSMC.
• 🔒 TSMC is Apple's exclusive supplier for semiconductors, a critical component of Apple's strategy, and has been since the iPhone 6's A8 processor.
• 💼 Apple's relationship with TSMC is based on a business principle of TSMC to never compete with its customers, which contrasts with Samsung's dual role.
• 💡 Apple's acquisition of PA Semi in 2008 for $276 million was a strategic move to design system-on-chips for their devices, leading to the A4 chip.
• 📉 The competition between Apple and Samsung in the mobile phone industry led Apple to diversify its supply chain, resulting in a partnership with TSMC.
• 💰 TSMC has made significant financial investments to meet Apple's demands, including spending $9 billion on a single fab for Apple.
• 🛠 TSMC's R&D and technology rollout strategies are tailored to align with Apple's annual product cycles, ensuring a consistent supply of advanced chips.
• 📈 TSMC's half-step process strategy allows for incremental improvements in chip technology annually, reducing the risk associated with more ambitious biennial jumps.
• 💲 Apple's significant orders have made it TSMC's largest customer, contributing to a substantial portion of TSMC's revenue and profitability.
• ❌ The idea of Apple buying TSMC is unlikely due to financial constraints, the potential destruction of TSMC's business model, and geopolitical considerations involving Taiwan.

Q & A

What is the significance of Taiwan in Apple's supply chain?

Taiwan is central to Apple's supply chain because five of its top ten electronic equipment suppliers are based there, including Foxconn and TSMC, which are arguably Apple's closest partners.

Why did Apple shift its semiconductor manufacturing from Samsung to TSMC?

Apple moved to TSMC because Samsung's entry into the mobile phone industry and a lawsuit over intellectual property theft led to a strained relationship. TSMC's business principle of not competing with its customers was also appealing.

What was the first custom semiconductor chip designed by Apple and who manufactured it?

The first custom semiconductor chip designed by Apple was the A4, which was manufactured at Samsung Foundry.

Why did Apple decide to acquire PA Semi?

Apple acquired PA Semi to design system-on-chips for their devices, which led to the creation of the Apple A4 chip.

How has TSMC accommodated Apple's demands for chip production?

TSMC has accommodated Apple by making significant upfront financial and resource investments, and by tailoring its R&D and technology rollout strategy to align with Apple's annual product cycles.

What is TSMC's half step process strategy and how does it benefit Apple?

TSMC's half step process strategy involves incremental improvements in performance or power each year, allowing for refinement and reliability without large risks, which is crucial for meeting Apple's annual iPhone chip requirements.

What is the financial relationship between Apple and TSMC?

Apple is TSMC's largest customer, representing a significant portion of TSMC's annual revenue. In 2019, Apple accounted for 23% of TSMC's revenue, which amounted to $8.2 billion.

Why did TSMC decide not to use the GAA technique in its N3 node?

TSMC opted not to use the GAA technique in its N3 node to avoid the risk of failure that could disrupt Apple's annual iPhone cycle, emphasizing reliability over revolutionary but risky technologies.

Why is Apple unlikely to buy TSMC despite its significant reliance on the foundry?

Apple is unlikely to buy TSMC due to financial constraints, the potential destruction of TSMC's value proposition as a neutral third party, and political barriers.

Outlines

00:00

🍎 Apple's Strategic Partnership with TSMC

Apple, an American company, has a significant portion of its supply chain in Taiwan, with five of its top ten electronic equipment suppliers located there, including Foxconn and TSMC. TSMC is the sole supplier of Apple's semiconductors, which are crucial for its devices. The relationship between Apple and TSMC began with the A4 chip in 2010, following Apple's acquisition of PA Semi. Initially, Samsung manufactured Apple's chips, but a souring relationship due to competition in the mobile phone market led Apple to TSMC. TSMC's business principle of not competing with customers and its ability to meet Apple's stringent requirements solidified the partnership. Apple's demand for high-quality chips has driven TSMC to make significant financial and technological investments, ensuring a consistent supply of advanced semiconductors. This partnership has been instrumental in Apple's growth into a trillion-dollar company and TSMC's position at the forefront of semiconductor manufacturing.

05:00

🔍 TSMC's Incremental Innovation and Apple's Loyalty

TSMC has adopted a half-step process strategy to ensure incremental improvements in performance and power efficiency annually, rather than risking large, infrequent jumps in technology. This approach has allowed TSMC to refine its technologies, such as the introduction of EUV, and maintain a reliable supply chain for Apple's annual iPhone releases. The strategy has been successful, as evidenced by TSMC being the first to ship chips with full EUV at high yield in 2020. Apple has remained loyal to TSMC, with the company becoming TSMC's largest customer, accounting for 23% of its annual revenue in 2019. TSMC's focus on meeting Apple's needs has been rewarded with significant revenue, as Apple is one of the few companies capable of paying a premium for cutting-edge chip technology. The partnership has been mutually beneficial, with TSMC's advanced processes contributing to Apple's product innovation and Apple's financial support enabling TSMC to continue pushing technological boundaries.

10:03

🏛 The Unlikeliness of Apple Acquiring TSMC

The idea of Apple acquiring TSMC is highly unlikely for several reasons. Firstly, Apple does not have the financial capacity to purchase TSMC, which has a market capitalization of $389 billion, while Apple has $190 billion in cash but also carries significant debt. Secondly, such a move would disrupt TSMC's business model as a neutral third-party chip manufacturer, potentially alienating other customers.

Keywords

💡Supply Chain

The supply chain refers to the network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. In the context of the video, Apple's supply chain is crucial as it involves key partners like Foxconn and TSMC, particularly in Taiwan, for assembling and manufacturing components like semiconductors. The video emphasizes the importance of TSMC in Apple's supply chain, highlighting its role as the sole supplier of Apple's semiconductors.

💡Semiconductors

Semiconductors are materials, typically silicon, that can conduct electricity under certain conditions but not in others, making them essential in electronic components. They are the 'heart' of modern electronics. The video discusses TSMC's critical role as the sole supplier of semiconductors for Apple, which are vital for the functioning of Apple's devices. This relationship underscores the significance of semiconductor technology in the tech industry.

💡Foxconn

Foxconn, formally known as Hon Hai Precision Industry, is a key partner in Apple's supply chain, responsible for the assembly of various Apple products, including the iPhone.

Highlights

Apple's products are assembled in China and India, but its supply chain's heart is in Taiwan.

Five of Apple's top ten electronic equipment suppliers are in Taiwan, including Foxconn and TSMC.

TSMC is the sole supplier of Apple's semiconductors, a critical aspect of its strategy.

Apple's first custom semiconductor chip, the A4, was unveiled in 2010 with the first iPad.

Apple acquired PA Semi for $276 million to design system-on-chips for their devices.

The relationship between Apple and TSMC began with the A8 processor in the iPhone 6, fabbed on TSMC's 20 nm process.

Apple's move to TSMC was driven by a desire to diversify its supply chain and avoid competition with Samsung.

TSMC's business principle of not competing with customers was a key factor in Apple's decision to partner with them.

Apple has remained with TSMC as its sole supplier for all its designed processors since the A8.

TSMC has made significant upfront financial and resource investments to accommodate Apple.

TSMC's R&D and tech rollout strategy has been crafted to align with Apple's annual product cycle.

TSMC's half step process strategy allows for incremental improvements in chip technology annually.

TSMC was the first foundry to ship chips with full EUV at high yield in 2020.

Apple's demand for cutting-edge technology has made it TSMC's single biggest customer.

In 2019, Apple represented 23% of TSMC’s annual revenue, amounting to $8.2 billion.

TSMC's 5nm process is highly profitable, with Apple being one of the few companies able to afford it.

With Huawei no longer able to book orders with TSMC, Apple's importance to TSMC has increased.

Apple is not going to buy TSMC due to financial, strategic, and political reasons.

Transcripts

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.