[Apple Shockwave](27) 'All In on Apple' The Choice That Changed TSMC's Fate

The Alliance History Between Semiconductor Foundry Leader TSMC and Apple
Apple Used Samsung Chips in the First iPhone
Continued Using Samsung Foundry Even After Design Independence
TSMC's Counterattack to Regain Foundry Market Pride
Apple COO: "A Great Relationship"

Editor's Note[Apple Shockwave] is a content series that explores 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 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 semiconductor production line investments, 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.

"We decided to produce all chips at TSMC, and TSMC invested $9 billion in 11 months with 6,000 people working around the clock. It was a great partnership." (Jeff Williams, Apple Chief Operating Officer)

Apple Silicon, that is, Apple semiconductors, are now widely regarded as the best in the mobile sector. Apple is expanding the domain of mobile system-on-chip (SoC) used in smartphones to PCs, building a solid fortress.

As covered earlier in Apple Shockwave, Apple Silicon first appeared in the world through Samsung Electronics. The relationship between Samsung and Apple, which began with mass supply of flash memory semiconductors for the iPod, accelerated when Samsung designed and manufactured chips for the iPhone that Intel had refused to supply.

It is undeniable that Samsung made an essential contribution to the first iPhone unveiled by Steve Jobs in 2007. Apple chose Samsung chips instead of Intel's XScale or Texas Instruments' OMAP, which were leading the market at the time.

Samsung began its foundry business as part of its System LSI division in 2005. At that time, the foundry was a small organization within Samsung Semiconductor. Nevertheless, Samsung supplying chips for the iPhone is an important and indelible chapter in smartphone history.

Apple's first self-designed 'A4' chip appeared after Apple acquired Intrinsity, which had supported Samsung's Exynos chip development. Apple had earlier acquired PA Semi and Intrinsity, laying the foundation for chip design. Even though Apple designed the chip itself, switching manufacturers was a risk. The A4 chip designed by Apple was also manufactured by Samsung's foundry.

The relationship between Apple and Samsung regarding application processor (AP) chips for the iPhone began to fracture alongside their patent litigation disputes. For TSMC, which was the number one foundry but had no dealings with Apple, this was a golden opportunity. Taiwanese TSMC, which stepped in between Apple and Samsung, caught a big fish.

If Samsung had focused on supplying semiconductors and displays for Apple instead of the smartphone business and remained the exclusive supplier until now, the semiconductor industry landscape would be very different. Of course, there is no guarantee Samsung would have maintained its exclusive supplier position. It is clear that the conflict between Samsung and Apple was a stroke of luck for Morris Chang, the founder of TSMC. Looking at TSMC's stock price and corporate value, it is easy to understand why it was called luck.

In 2007, when Samsung supplied the first iPhone chip, TSMC's market capitalization was about $50 billion. Samsung's market capitalization was in the $70 billion range. In 2014, TSMC supplied chips for the iPhone 6. At that time, its market capitalization was about $100 billion. In 2016, when TSMC became the sole chip supplier for the iPhone, its market capitalization surpassed $120 billion. Since then, it has continued to surge.

Especially in 2017, the launch of the iPhone X, the 10th anniversary model, and the rapid performance improvement of Apple Silicon almost coincided with the upward trend in TSMC's stock price. After the iPhone X release, in 2018, TSMC's market capitalization exceeded $200 billion. The semiconductor supply shortage highlighted by COVID-19 and TSMC's rising status caused its stock price to soar. The record high market capitalization in 2022 was $729 billion.

In 2017, when TSMC surpassed Intel's market capitalization at about $200 billion, Samsung Electronics' market capitalization was about $300 billion. The gap between the two companies was 50%.

The current situation is the opposite. As of August 18, 2023, TSMC's market capitalization is $435 billion, and Samsung's is $336 billion. TSMC even became the semiconductor industry's market cap leader in early 2021, before Nvidia's AI semiconductor boom.

This exemplifies Apple's decisive contribution to TSMC's growth. About ten years after cooperating with Apple, TSMC has become a company on a different level than before. As of last year, Apple accounts for about 23% of TSMC's revenue, making it the largest customer. Considering that Apple and Nvidia's relationship began around 1993, the relationship between Apple and TSMC is still adolescent but is at an alliance level.

The opportunity to manufacture all the chips for iPhones, which sell 250 million units annually, is not easily obtained. TSMC originally missed that opportunity.

For TSMC, which first introduced the foundry business to the world, the cooperative relationship between Apple and Samsung must have been a burden. At the early stage of the iPhone launch, TSMC had outstanding customers like Nvidia, Qualcomm, and AMD, but Apple was a must-have customer. Especially for Morris Chang, the founder of TSMC who openly spoke of defeating Samsung, winning Apple's chip orders was a fateful task.

When the iPhone appeared, Morris Chang was out of management. Chang, who returned to Taiwan from the U.S. in his 50s, stepped down from the chairman position in 2005 at age 70.

At the moment Chang was out of management, Apple partnered with Samsung. It was natural for Apple, which lacked design capability, to partner with Samsung. From TSMC's perspective, lacking design capability, it could only watch Samsung win Apple's orders.

Then came the 2008 financial crisis. The crisis led to reduced investment. TSMC, without Chang, chose to cut investment and reduce staff. Chang, who had first introduced a strategy of crushing competitors through large-scale investment while at Texas Instruments, could not accept this.

Chang returned to management around 2010 and waited for an opportunity. He was keenly watching for a chance to win Apple's chip orders. The opportunity came soon.

One day in 2010, Jeff Williams, Apple's current Chief Operating Officer (COO), had dinner with Morris Chang and his wife Sophie Chang. In 2010, before the Apple-Samsung patent disputes began, Samsung's 'Galaxy S' was emerging as a strong competitor to the iPhone.

Williams' remarks at TSMC's 30th anniversary event in 2017 suggest that the relationship between TSMC and Apple had become a blood alliance.

Jeff Williams, Apple's Chief Operating Officer, is speaking at the TSMC 30th Anniversary Panel held in 2017. Photo by YouTube

"The first seed of the partnership between Apple and TSMC was planted in 2010. I had a wonderful dinner at the Changs' home in Taiwan. At that time, we were not yet doing business with TSMC, but we had a good conversation. We talked about the possibility of working together and knew that if we could combine advanced technology with our ambitions, the potential would be great. It seems obvious now, but at that time it was a very risky endeavor.

We decided to take a bet and leap forward together, and Apple decided to manufacture all the APs for iPhone and iPad at TSMC. TSMC invested $9 billion in 11 months, and 6,000 employees worked around the clock. During that short period, we shipped over 500 million chips together. There are very few companies on Earth with a capital of $9 billion. It was a tremendous investment. I thank Dr. Chang and everyone at TSMC. It was a great partnership."

The relationship between Apple, Samsung, and TSMC continues in the next installment.