Samsung understood to win iPhone chip contract

Samsung will manufacture the main chip in Apple's next iPhone model, regaining a customer previously lost to Taiwan Semiconductor Manufacturing, people with direct knowledge of the matter said.

Samsung will start making Apple A9 processor chips at its Giheung plant in South Korea, the people said, asking not to be identified because the contract hasn't been discussed publicly. Additional orders will go to Samsung's partner Globalfoundries, according to another person familiar with the arrangement.

Winning this order from Apple will help the world's second- largest chipmaker rebound against TSMC, which last year ended Samsung's monopoly over contracts to make iPhone and iPad chips.

Both manufacturers have boosted capital expenditures to gain business from Apple and Qualcomm in the more than $300 billion semiconductor industry.

The Apple order may lead to additional business, said Song Myung Sup, a Seoul-based analyst at HI Investment and Securities. “If Globalfoundries quickly adopts Samsung’s most advanced technology and increases yield, it could also win orders from Qualcomm.”

Kelly Yeo, a spokeswoman for Samsung, declined to comment. Kevin Kimbal, a Globalfoundries spokesman, said his company doesn’t comment on any customer relationships. Josh Rosenstock, an Apple spokesman, declined to comment. Elizabeth Sun, a spokeswoman for TSMC, declined to comment.

Apple picked TSMC to produce A8 processors for the iPhone 6 and iPhone 6 Plus devices. Those agreements came as the relationship between Apple and Samsung soured because of legal disputes dating to 2011. Apple’s decision to turn back to the rival for supply of crucial components may vindicate Samsung’s investments in trying to grab the lead in manufacturing technology.

Apple spent $25.8 billion on chips last year, accounting for 7.6 per cent of industry purchases, researcher Gartner said.

The smartphone maker has yet to announce specifications or unveil a design for its next new iPhone. In the past, Apple has introduced interim versions denoted with an S, leading to speculation the next device out this year will be the iPhone 6s.

Supplying chips for the iPhone and its own S6 smartphone will help Samsung turn its non-memory semiconductor business from a 1 trillion won loss last year to a 1 trillion won gain, said Song of HI Investment.

Samsung and TSMC said they would invest heavily this year to put advanced production capabilities in their plants, moves that analysts said were based on assumptions they would get orders from Apple.

Taiwan Semiconductor, the world’s biggest contract manufacturer of chips, budgeted a record $12 billion for plants and equipment. Chairman Morris Chang told investors in October that TSMC would lose ground to Samsung in the most-advanced chip technology before reclaiming the upper hand in 2016.

Whether Samsung can hold onto the contract exclusively may depend on how quickly TSMC can bring online more advanced production and the pricing that both companies are willing to offer Apple. The benefit of using one supplier – in Samsung’s case with the backup of Globalfoundries – comes from the cost savings in designing the chip to fit that chipmaker’s specific manufacturing technique and not having to replicate that work elsewhere.

UBS estimates Samsung made $3.7 billion in capital expenditures on its processor business last year and may raise that to $4.9 billion this year. Samsung doesn’t disclose those figures, but executives said on a January 29th conference call the company will boost spending this year.

The company is spending $15 billion on a new chip plant outside Seoul. Samsung partnered with Globalfoundries last year in the made-to-order chip business, an alliance targeting TSMC. Globalfoundries is licensing Samsung’s most advanced 14- nanometer processor technology, giving customers access to factories in Texas, New York state and South Korea. – Bloomberg