The Bizarre Apple-Samsung Marriage

Samsung is expected to be the fourth largest foundry this year with revenues of $3.4 billion – not huge considered against TSMC’s $16.7 bn – but significant and growing and with the intent to keep growing as shown by its $4 billion investment in its Texas fab this week.

Samsung has the capacity, the budget – $13 billion semiconductor capex this year – and the desire to become a major force in the IC foundry business.

Samsung’s capacity dedicated to its IC foundry business is thought to be 130K 300mm wafers per month as of mid-2012.

Using an average revenue per wafer figure of $2,500, Samsung currently has the potential to produce annual IC foundry sales of about $3.9 bn.

In 2Q12, Samsung was by far the largest supplier of smartphones in the world, shipping an estimated 54m handsets with Apple coming in second after selling about 26m iPhones.

Thus, in total, Samsung and Apple represented almost half of the total worldwide smartphone shipments (168 million) in 2Q12. As a result, Samsung is enjoying a tremendous amount of synergy by supplying application processors to the largest (i.e., itself) and second-largest (i.e., Apple) suppliers in the world of one of the hottest electronic system products in the world–smartphones.

After surging by 82% in 2011, Samsung’s IC foundry sales are forecast to jump by another 54% in 2012, which would make it the fastest growing top ten IC foundry last year and this year.

Moreover, Apple’s 2012 share of Samsung’s total foundry sales is expected to be 85%. However, as Apple begins to engage other foundries (e.g., TSMC) to produce its custom processors, Samsung will need to make up for these lost sales by signing up additional large-scale customers.

While Apple and Samsung are currently embroiled in a dramatic courtroom battle concerning various lawsuits and counter-lawsuits regarding system level patents, Apple is still very reliant on Samsung for advanced IC processor production for its iPad tablets, iPhone handsets, and iPod portable media players. It should be noted that TSMC was working at over 100% utilization in mid-2012 and essentially had no ability to allocate large amounts of leading-edge IC production capacity to Apple.

One important factor that is often overlooked with regards to the Samsung/Apple IC supply relationship is the large amount of memory, both DRAM and flash, that Apple buys from Samsung, the largest IC memory manufacturer in the world.

Since Apple is such a big memory customer, Samsung is able to “bundle” its IC offerings to Apple and deliver a cost-effective high-volume supply of leading-edge flash memory, DRAM, and processors to the company.

As of mid-2012, no other foundry in the world could come close to matching Samsung’s total IC supply capabilities. So, while Apple and Samsung battle it out in the courtroom over system level issues, at the chip level, Apple must continue to endure its “marriage of convenience” with Samsung.

There is no doubt that Apple is looking to diversify away from being so reliant on its major system level competitor (Samsung) for the production of its advanced ICs but, with TSMC capacity so tight, it can’t.