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More Proof That Apple Inc. (AAPL) Is Ditching Samsung

In the surest sign yet that Apple Inc. (NASDAQ:AAPL) has finally ditched Samsung in favor of Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) for its chip manufacturing needs, The Wall Street Journal is now corroborating separate claims from DIGITIMES that the Mac maker has indeed inked a deal to switch.

Instead of citing anonymous supply chain sources like the Taiwanese publication, the WSJ confirmed the deal with a “TSMC executive.” The transition has been difficult, as TSMC has worked to overcome technical challenges with making chips that meet Apple Inc. (NASDAQ:AAPL)’s quality standards. Samsung is expected to stay on as a chip supplier through next year as Apple moves production to TSMC.

Apple Inc. (AAPL), Inc. (AMZN), Barnes & Noble Inc. (BKS)

Switching to Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) has been a long time coming, and Apple has been in talks with TSMC since as early as 2010. The pair began meeting in 2011 to collaborate on how to make it happen. TSMC will start ramping up 20-nanometer chip production for Apple Inc. (NASDAQ:AAPL) in early 2014.

The WSJ also notes that Apple Inc. (NASDAQ:AAPL) was interested in investing in the chip manufacturer, or alternatively to secure capacity dedicated to Apple. Taiwan Semiconductor Chairman Morris Chang reportedly turned down the proposal because he wanted to company to be able to maintain flexibility. That corresponds with a Bloomberg report from last year that said Apple and QUALCOMM, Inc. (NASDAQ:QCOM) had each offered over $1 billion to invest in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) to secure capacity. With $6.2 billion in cash at the end of March, TSMC isn’t exactly hurting for money to invest in factories.

Apple Inc. (NASDAQ:AAPL) remains Samsung’s largest component buyer, ordering an estimated $10 billion last year. That would be one-sixth of Samsung’s component business. The iPhone maker has been trying to change that over the past few years by slowly shifting its purchases to other suppliers. It’s hard to avoid Samsung altogether, though, since the South Korean giant is the leading vendor for a wide range of crucial ingredients like flash memory chips and displays.

Ditching Samsung could be a blow to its component business, though the majority of Samsung’s operating income now comes from its mobile division and the component business is less profitable.

Income Statement Data Mobile Semiconductor
Sales $28.9 billion $7.6 billion
Operating profit $5.7 billion $942.3 million
% of total sales 62% 16%
% of total operating profit 74% 12%

Source: Samsung. Figures shown for most recent quarter and are translated from South Korean won.

The semiconductor segment is a respectable chunk of sales and operating profit, but Samsung can find consolation in its mobile segment.

Following Apple’s loss of investor confidence, Samsung is seemingly starting a pullback of its own after losing 13% of its value in June. Apple Inc. (NASDAQ:AAPL)’s planned switch to TSMC will add insult to injury.

The article More Proof That Apple Is Ditching Samsung originally appeared on and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple and Qualcomm. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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