Is Qualcomm Inc. Trying to Reduce its Reliance on Taiwan Semiconductor Mfg. Co. Ltd.?

By Markets Fool.com

In July, Qualcomm and Semiconductor Manufacturing International announceda collaboration in which the former would design chips that would bemanufactured by the latter on its 28-nanometer technology. In a press release issued this month, the two companies said they have "successfully produced" Qualcomm's Snapdragon 410 processor.

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Meanwhile, just last week, DigiTimesreportedthat Qualcomm and MediaTek -- the two leading mobile processor vendors -- are looking to "diversify [their] foundry sources." The article noted that Qualcomm aims to work more closely with Semiconductor Manufacturing, United Microelectronics, Samsung , and GlobalFoundries.

It looks as though Qualcomm is trying to reduce its reliance on Taiwan Semiconductor . The question, though, is whether it will succeed.

What does Taiwan Semiconductor have to say?
During Taiwan Semiconductor's most recent earnings call, analysts asked a number of questions related to the company's ability to maintain 28-nanometer share and to keep factory utilization high. Given that Semiconductor Manufacturing International andother foundries have signaled their intent to take share in 28 nanometer, it's only natural investors might worry about share loss.

Taiwan Seminconductor co-CEO Mark Liu had this to say onthe competitive dynamics at the 28-nanometer technology generation: "This is already, from 2011 this is the fifth year of 28-nanometer production. The learning curve brings us to a very, very mature state that all the cost reduction and many of the yield improvement will be our competitive advantage and also increase our margins."

This is a very interesting point.

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Maturity drives cost competitiveness
In today's semiconductor world, it is generally accepted that foundries charge by thewafer. As part of these supply agreements, minimum chip yield rates are stipulated. If a company can on average deliver more (good) die per wafer than a competitor, then its wafers are more valuable to potential customers.

So, if Taiwan Semiconductor offers a 28-nanometer wafer for $4,000 and 90% of the chips work as intended, then the customer is getting a far better deal than if it bought a $3,000 wafer from a competitor on which only 50% of the chips work. These are obviously hypothetical numbers, but if Taiwan Semiconductor can deliver better-yielding wafers than the competition, then it can improve its margin structure per wafer -- as Liu suggested.

What does this mean for Taiwan Semiconductor and Qualcomm?
While Taiwan Semiconductor manufactures a significant portion of Qualcomm's chips, it is not, even today, Qualcomm's sole foundry partner. For example, Chipworks reportedthat Qualcomm sourced its stand-alone MDM9215 LTE modem from both Taiwan Semiconductor and Samsung. In other words, Taiwan Semiconductor has had, and will continue to have, competition.

At the end of the day, Qualcomm likely just wants a reliable supply of chips built as cheaply as possible. It makes perfect sense that Qualcomm seems to want to enable as many of Taiwan Semiconductor's competitors as possible, but whether those companies ultimately impact Taiwan Semiconductor's margins and/or market share remains to be seen.

The article Is Qualcomm Inc. Trying to Reduce its Reliance on Taiwan Semiconductor Mfg. Co. Ltd.? originally appeared on Fool.com.

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.