Apple Inc. Reportedly Taps Taiwan Semiconductor for S2 Chip Manufacturing

By Markets Fool.com

Image credit: Apple.

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It's well known that Apple (NASDAQ: AAPL) relied on its arch rival, Samsung (NASDAQOTH: SSNLF), to manufacture the processor inside its first-generation Apple Watch wearable device. That chip was built on a relatively dated 28-nanometer manufacturing technology, which, for an extremely power-limited wearable design, led to significant limitations in terms of performance.

According to KGI Securities analyst Ming-Chi Kuo, via Digitimes,, the next-generation Apple Watch -- known as the Apple Watch 2 -- as well as a refreshed variant of the current-generation Apple Watch will use a new applications processor manufactured in Taiwan Semiconductor's (NYSE: TSM) 16-nanometer process technology.

A win for TSMC

TSMC has been talking about a variant of its 16-nanometer manufacturing technology known as 16FFC, targeted at low cost and low-power applications. This, rather than the higher-performance 16-nanometer FinFET Plus technology used to manufacture some of Apple's A9 processors, is what I'd bet Apple will use for the S2 processor.

Although the market for smartwatches isn't as large as some market research firms had predicted it to be by now, one estimate says the iDevice maker shipped 12 million Apple Watches in 2015. This is a multimillion-unit market, and if TSMC can consistently nab the applications processor orders for the Apple Watch, it'll represent a nice, though hardly game-changing, piece of incremental revenue.

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And, perhaps more importantly in the fiercely competitive semiconductor manufacturing market, it'll mean less money flowing into the Samsung foundry's coffers.

A win for Apple

The first-generation Apple Watch applications processor was quite slow, sporting a single, relatively slow CPU core and a fairly dated graphics core from the company's longtime graphics processor supplier, Imagination (NASDAQOTH: IGNMF).

By transitioning to a variant of TSMC's 16-nanometer technology, Apple should have the transistor and power budgets to build a much more powerful applications processor while keeping power consumption in check. I expect a move to a faster processor core -- though I would be surprised to see Apple adopt multiple cores at this stage of the game -- as well as to a beefier, more modern graphics processor.

In a nutshell, the basic tasks for the next-generation Apple Watch -- as well as the refreshed variant of the current one with the new processor -- should become much faster, and developers will have much more freedom to deliver exciting new applications.

It's the last part that's so important

Apple isn't the first company to bring to market a smartwatch, but even as a late entrant, it has managed to grow its share of the market, which it has dramatically expanded, to north of 50%, according to Strategy Analytics.

Right now Apple has the distinct advantage of having an overwhelmingly dominant market share. High market share means developers will be more interested in targeting Apple's platform rather than competing platforms. More developer attention means more and better software for Apple's platform relative to competing platforms, which helps Apple to keep current Apple Watch users loyal to the platform and to entice first-time smartwatch buyers to hop on to the Apple bandwagon.

Also note that the Apple Watch currently requires an iPhone to function, so the more that iPhone customers adopt and are satisfied with the Apple Watch, the potentially stronger Apple's iPhone share position will be.

Apple's job now is to keep pushing the watchOS platform by both making software development easy and giving developers first-rate hardware to target their apps to. The applications processor inside the S2 system-in-package should certainly help with the latter.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.