Taiwan Semiconductor Manufacturing (NYSE:
TSM
) is gearing up to produce of microprocessors for Apple's
(Nasdaq:
AAPL
) next generation of iPads starting in 2013.
Apple currently buys all of its CPUs from Samsung Electronics
but has decided to diversify its suppliers. Most companies
procure key components, such as CPUs, from several different
companies to spread the risk of a supply disruption in the event
of a fire, earthquake or some other disaster. Apple is further
motivated to diversify away from Samsung since the two companies
compete in the smartphone market and are fighting a copyright
battle in the courts.
TSMC is the world's largest semiconductor foundry,
manufacturing chips for a wide range of customers. The company's
business model calls for it to remain independent, serving a
broad customer base to avoid being overly dependent upon a single
customer.
TSMC provides manufacturing services to fabless chip designers
including Qualcomm (Nasdaq:
QCOM
), Advanced Micro Devices (Nasdaq:
AMD
) and Nvidia (Nasdaq:
NVDA
). In addition, integrated device manufacturers, such as Intel
(Nasdaq:
INTC
) subcontract some of their own manufacturing to TSMC.
Last summer, after TSMC chairman Morris Chang said that he was
open to dedicating a fab to a single customer, both Apple and
Qualcomm separately approached TSMC seeking to invest more than
$1 billion in the company in order to secure exclusive access to
TSMC chips for mobile devices. Chang turned down both suitors
"TSMC wants to retain control of its plants, doesn't want to sell
part of itself and doesn't need cash for investments," TSMC CFO
Lora Ho told
Bloomberg
in a July 19 interview.
The Bloomberg article continued, "Apple and Qualcomm are
trying to improve their position in a supply chain where a
shrinking number of companies are capable of churning out the
millions of parts needed to meet surging smartphone demand…While
TSMC is Qualcomm's biggest supplier, according to data compiled
by Bloomberg, it has been successful because it has worked with
multiple customers. Dedicating one facility to a single product
or customer creates the risk of a fabrication plant becoming a
burden if the product, client or technology changes, said
Ho."
On October 12,
China Economic News Service
reported that Apple was going to make TSMC its exclusive supplier
of 20 nanometer design rule, quad-core processors for the next
generation of iPads, iTVs and possibly Macbooks. iPhones are
expected to continue to use Samsung's dual-core processors
because they consume less power, China Economic News Service
said.
"Citigroup Global Markets' market research fellow, J.T. Hsu,
pointed out that Apple began verifying TSMC's 20nm process in
August this year and may begin risk production in November with
the process," China Economic News Service said. "Volume
production is expected to start in the fourth quarter of 2013,
raising the possibility that TSMC will hike capital expenditure
to US$11-12 billion in 2013 and 2014."
Apple's move away from Samsung to TSMC shook the Apple world
when it was announced.
Now,
DigiTimes
reports that the semiconductor industry is concerned that TSMC's
orders from Apple will crowd them out of the company's most
advanced production facilities.
"Demand from Apple is expected to be huge, said the observers,
adding that allocation of TSMC's available advanced process
capacity among its major clients will be a critical decision to
be made by the foundry," DigiTimes wrote. "…While being capable
of providing sufficient capacity to Apple, TSMC also does not
want to upset its existing major clients, the observers noted.
Allocating efficiently its production capacity will be a focus
for the foundry in 2013, the observers believe…TSMC will need at
least more than 200,000 12-inch wafers ready to satisfy the huge
demand from Apple, the observers said."
Apple's orders are expected to impact TSMC's sales and
earnings in 2013, a year earlier than most analysts were
thinking.
The TSMC ADR is trading at the highest level since the
bursting of the technology bubble back in 2000. In February 2000,
the ADR price peaked at 22.52. After bottoming at 5.84 in
November 2008, the shares have been in a solid uptrend through
2011 and 2012 and are trading at a 12-year high.
Given the positive outlook for orders from its newest
customer, Apple, and continued demand from the company's existing
customers, investors might do well to buy TSMC ADRs on any
pullback below 16.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.