[Apple Shockwave]⑦ iPhone 15 Pro Priced at 2 Million Won? The Reason Is the 3nm Chip

Expected First iPhone Price Increase Since 2017
Possibility of Reaching 2 Million Won
TSMC 3nm Process Chip Key Factor in Price Hike
'Made in America' Chips May Also Drive Price Increase

[Apple Shockwave] is a content series that examines the upheaval caused by Apple entering the semiconductor market. You might wonder why Apple is involved in semiconductors. Apple is no longer just a company that makes smartphones and computers. After long efforts starting from the late founder Steve Jobs, Apple has designed world-class semiconductors used in mobile devices. If Intel was the leader in the PC era, Apple has become the top predator in the mobile era semiconductor ecosystem. Amid the global semiconductor supply chain crisis and large-scale investments in semiconductor production facilities, we will carefully examine the upheaval and prospects in the semiconductor market brought about by Apple Silicon to broaden our readers' insights. Apple Shockwave will visit readers every Saturday. After more than 40 installments, it will be published as a book.

Freshman college student A is eagerly waiting for the 'iPhone 15 Pro' to be released this fall. He is enduring the strong 'ppomppu' (urge to buy) of Samsung Electronics' powerful 'Galaxy S23' and holding on. Although the iPhone 15 Pro carries a price tag of at least 1,550,000 KRW, with the launch of the convenient payment service Apple Pay, he is determined to switch to the iPhone this time. However, A is likely to have to pay an even higher cost to purchase the iPhone 15 Pro. This is because the price of the iPhone is expected to rise significantly. If Apple raises the price of the iPhone Pro, it will be the first time since 2017. Why is this happening just as A is about to buy an iPhone?

Performance-upgraded iPhone chip also increases costs

Semiconductors are the largest component in smartphones. Especially, the prices of the application processor (AP), which acts as the brain, and the communication modem are key. Analysis firm TechInsights estimated that the total manufacturing cost of the Apple iPhone 14 Plus is $527, of which the modem accounts for $47 and the AP for $81. Including other semiconductors, semiconductors are estimated to account for 54% of the total iPhone manufacturing cost.

Despite the semiconductor supply shortage caused by COVID-19, which caused car prices to skyrocket, Apple froze the price of the iPhone 14 series in the U.S. last year. The A16 chip used in the iPhone 15 Pro uses an improved 4nm process compared to the 5nm process of the A15. Despite the chip cost increase, Apple chose to keep the price unchanged this time as well. Since the release of the iPhone X, the 10th-anniversary model in 2017, Apple has maintained the price of the Pro-level product line without increases. The $999 price tag of the Apple iPhone was as meaningful as Daiso’s '1000 won' price tag.

Jeff Pu, an analyst at Haitong Securities, China’s largest securities firm, recently forecasted in a report that the iPhone 15 Pro price could rise by $200. The possible use of a titanium frame is also a factor that could drive up the price, but the key is the 'A17' chip to be used in the iPhone 15 Pro. When Apple introduced the iPhone 14 last year, it used the 'A15' chip from the iPhone 13 in the standard model and the newly introduced 'A16' in the premium Pro model. The iPhone 15 to be released this year is likely to use the A17 in the Pro line and the A16 in the standard iPhone. There is also speculation that if Apple introduces the top-tier 'iPhone 15 Ultra,' it could carry a price tag of 3,000,000 KRW. Apple is serious about 'tiering' these days.

Has Apple CEO Tim Cook really changed his mind about iPhone pricing? If so, the most likely reason is semiconductors. The dominant analysis is that the soaring cost of high-performance chips used in the recently prominent iPhone Pro series has made it difficult to maintain the current iPhone price. The $999 price tag could finally exceed $1,000. The domestic selling price could approach 2,000,000 KRW.

Semiconductors improve performance as advanced fine manufacturing processes are applied. By integrating more transistors in the same size to increase performance, power consumption is reduced.

Mark Liu, Chairman of TSMC, stands in front of a wafer produced using the 3-nanometer process.
[Image source=Reuters Yonhap News]

Apple’s strategy is to widen the gap again with the 3nm process 'A17' chip as Samsung Electronics aggressively pursues with the Galaxy S23 using Qualcomm’s 'Snapdragon 8 Gen 2' chip produced on TSMC’s 4nm process. Analysis shows that compared to the A16, the A17’s single-core performance improves by about 60%, and multi-core by about 40%. The performance improvement is largely attributed to the application of the 3nm process. Since Apple has secured all of TSMC’s first-phase 3nm process capacity, AMD, Nvidia, and Qualcomm are expected to receive chips produced on TSMC’s other 3nm process, N3E, starting in the second half of this year, later than Apple.

While performance improvements are welcome, price increases are an 'uninvited guest.' According to foreign media, Apple has virtually monopolized TSMC’s 3nm process, which began mass production at the end of last year. Both TSMC and Samsung Electronics face the challenge of improving yields for the 3nm process.

To monopolize limited production volume, a higher price must be paid. This is why the price negotiation advantage, which had tilted toward Apple, has shifted somewhat toward TSMC. WCCFTech evaluated, "Apple is willing to bear significant costs to monopolize TSMC’s 3nm process." In fact, when TSMC upgrades its 5nm process to 4nm, which is then changed to 3nm, chip power efficiency reportedly improves by about 35%. Chip size also shrinks, and performance increases by about 15%. The iPhone 15 Pro using the 3nm process chip will have longer battery life and improved performance accordingly.

The problem is that TSMC is attaching a higher price tag to semiconductors produced on the 3nm process. Since the 3nm process production volume, which started mass production in December last year, is insufficient, and Apple is trying to monopolize production, TSMC has gained the upper hand in negotiations. It is reported that a single 3nm process wafer from TSMC costs $20,000. The wafer price for TSMC’s 5nm process is estimated at about $16,000.

Last year’s iPhone price freeze can be seen as a result of the strong U.S. dollar. Even if the cost of parts sourced outside the U.S. rose, there was a 'buffer zone' that could sufficiently offset it when converted to dollars (in Korea, the iPhone price rose significantly due to the weak won). This year is different. With little change in exchange rates compared to last year, the uninvited guest of soaring parts costs has appeared. At this point, it is highly likely that Apple will set a different price tag on the iPhone to maintain profitability and defend its stock price. MacRumors.com also forecasted that Apple might raise prices this time to maintain profitability.

Moreover, Apple’s 75% share of the premium phone market increases its pricing power. According to market research firm Counterpoint Research on the 23rd, although global smartphone sales decreased by 12% compared to the previous year, premium smartphone sales increased by 1%. Apple accounted for 75% of total premium smartphone sales. Apple’s market dominance and high customer loyalty reduce consumer resistance to price increases.

There is also a counterargument. Experts suggest that Apple may not pass all the increased chip procurement costs onto product prices. This is because CEO Tim Cook, a master of supply chain management, has a natural talent for cost reduction. It is an industry consensus that Cook applies pressure in negotiations to the point of exhausting the other party. Unlike founder Steve Jobs, who opened his wallet generously for good parts, Cook majored in industrial engineering. He is a 'master' at cutting parts costs, improving processes, and managing inventory.

Apple might also try to lower parts unit costs in other ways, such as replacing externally sourced chips with in-house developed ones. The fact that computers using Apple’s 'M1' chip were priced lower than those using Intel chips fuels this speculation. Apple is expected to use its self-developed modem chip in iPhones starting next year. Cristiano Amon, CEO of Qualcomm, which supplies modems to Apple, publicly revealed this fact earlier this month at the Mobile World Congress (MWC) held in Barcelona, Spain.

Apple CEO Tim Cook attended and spoke at the equipment installation ceremony of TSMC's Arizona plant, a Taiwanese semiconductor foundry, held in Phoenix, Arizona, USA, on December 6 last year (local time). Tim Cook said, "Thanks to the efforts of many people, these chips can now proudly bear the label 'Made in America'." U.S. President Joe Biden also attended the event. [Image source=Yonhap News]

Double-edged sword 'Made in America'

The U.S. government’s push to expand semiconductor production domestically is also a risk factor that could drive up iPhone prices.

Samsung Electronics, TSMC, and Intel are building advanced semiconductor factories in the U.S. Through this, the U.S. is expected to significantly alleviate the semiconductor supply chain crisis, but there are concerns about side effects such as rising smartphone prices.

U.S. CNBC recently reported growing concerns that chip manufacturing costs will rise due to domestic semiconductor production, causing prices of consumer products like smartphones and game consoles to soar. This is because the costs of building and operating semiconductor factories in the U.S. are higher compared to Taiwan or Korea.

So far, Apple has used AP semiconductors produced at TSMC’s Taiwan factories, but CEO Tim Cook has pledged to use American-made semiconductors. Once TSMC’s Arizona plant is fully operational, it is expected that American-made semiconductors will be included in iPhones.

Robert Mokos, CEO of SocialMobile, estimated that the manufacturing cost of chips produced in the U.S. could rise by more than 40% compared to those made in Taiwan. In this case, the cost increase factor for the iPhone alone would be over $100.

Wendell Huang, TSMC’s Chief Financial Officer, also mentioned in a recent earnings report that the cost of building factories in the U.S. is much higher than in Taiwan. TSMC is investing $40 billion in the Fab under construction in Arizona. He stated, "The cost of building a factory (Fab) in the U.S. can be 4 to 5 times higher than in Taiwan." This is due to inflation, labor costs, permit fees, and industrial safety and health regulations, which are significantly higher in the U.S. compared to Taiwan.