For many years, wireless technology giant Qualcomm (NASDAQ: QCOM) relied heavily on contract chipmaker Taiwan Semiconductor Manufacturing Company (NYSE: TSM) to build its flagship Snapdragon applications processors and cellular modems.
The Snapdragon 800, 801, and 810 applications processors, for example, were manufactured by TSMC, as were many generations of stand-alone cellular modems, too.
However, over the last couple of years, Qualcomm has moved the manufacturing of its high-end applications processors and stand-alone cellular modems to Samsung (NASDAQOTH: SSNLF) .
The Snapdragon 820 and 821 applications processors are manufactured using Samsung's 14-nanometer LPP technology, and the Snapdragon 835 is built using Samsung's 10-nanometer LPE technology. Qualcomm's Snapdragon X16 cellular modem is also built by Samsung using a 14-nanometer technology (likely 14-nanometer LPP).
The prior-generation Snapdragon X12 stand-alone modem, by contrast, was manufactured by TSMC.
Per a fresh report from DigiTimes, citing "industry sources," Qualcomm will build future stand-alone cellular modems -- though not applications processors (which, by the way, generally incorporate a cellular modem) -- using TSMC's 7-nanometer technology.
"Qualcomm is expected to determine whether it will continue to contract Samsung to manufacture its next generation AP or switch the orders to TSMC when both foundries develop their respective second-generation [7-nanometer] process technologies," DigiTimes said, citing those industry sources again.
Here's what this means
At this point, Qualcomm is pretty much the "anchor customer" of Samsung's logic chip manufacturing efforts. Sure, Samsung has other clients (including itself via its in-house Exynos applications processors), but by building chips for Qualcomm, Samsung gets to profit from chip sales into most of the world's premium smartphone models.
And, of course, it is those premium smartphone models that tend to use cutting-edge chip manufacturing technologies.
If Qualcomm ultimately chooses to have TSMC, not Samsung, build its future applications processors, then it's hard to see Samsung's contract chip manufacturing operations remaining viable as an entity that's run with the intent to be profitable.
The development of chip manufacturing technologies is expensive and building and equipping chip manufacturing factories is also very costly. Without a lot of business -- either by way of a single large anchor customer like Qualcomm or a rather broad set of small customers -- it's tough to justify continued investments here.
Now, Samsung may very well continue to soldier on in the logic chip manufacturing business by building its own Exynos chips and maybe chips for other small clients, and it would probably lose money doing so, but in that case, shareholders wouldn't be particularly happy.
If Qualcomm doesn't choose TSMC to build its future high-end applications processors, though, then TSMC should be OK if it major customers (e.g., Apple ) don't defect.
Interestingly, TSMC management has indicated that its goal with each successive chip manufacturing technology generation is to increase its market share. So, I suspect that TSMC is hopeful that it can eventually get Qualcomm to build its high-end applications processors in its factories, rather than at Samsung's.
10 stocks we like better than Qualcomm
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Qualcomm wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 5, 2017