Qualcomm, Inc. Reportedly to Tap Taiwan Semiconductor Mfg. Co. Ltd. for Snapdragon 830

By Markets Fool.com

Image source: Qualcomm.

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Beginning with its Snapdragon 820 high-end smartphone processor, Qualcomm (NASDAQ: QCOM) began having its high-end smartphone processors manufactured at Samsung (NASDAQOTH: SSNLF) in a high-profile shift away from Taiwan Semiconductor Manufacturing Company (NYSE: TSM).

Qualcomm is also expected to tap Samsung for the manufacture of its next generation premium applications processor known as Snapdragon 830. The Snapdragon 830 is expected to be built using Samsung's recently announced 10-nanometer LPE technology.

Interestingly, per a report from China-based publication Economic Daily News (via DigiTimes), Qualcomm may be planning to shift "follow-up orders" for the Snapdragon 830 from Samsung to TSMC as production of the Snapdragon 830 has "reportedly fallen behind schedule."

Production falling behind schedule wouldn't be surprising

Although Samsung made a big splash recently with its press release saying that it's now mass producing chips on its 10-nanometer LPE process, such a schedule slip wouldn't come as a surprise (if the report is accurate).

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For one thing, Samsung may have taken an immature, low-yielding manufacturing process and thrown it into the production facilities to meet both Qualcomm's and Samsung Mobile's aggressive product release schedules (new Galaxy S series smartphones, as well as other flagship mobile devices, usually launch in the spring).

If that's the case, Qualcomm might be finding itself with a lot of chips coming off the line either dead (low functional yield) or with chips that simply don't meet performance specification (also known as parametric yields) and are thus are unsuitable for sale.

Indeed, generally reliable mobile supply chain analyst Ming-Chi Kuo with KGI Securities reported (via MacRumors) that yield issues on Samsung's 10-nanometer process is one reason that Samsung may not "rush" the Galaxy S8 series smartphones to market.

Where does TSMC fit in?

Samsung's contract chip manufacturing business brought in about $2.67 billion in revenue, per IC Insights, during 2015 while TSMC's grew to more than $26 billion in that time. TSMC is far and away the market leader in contract chip manufacturing, and I believe that this massive revenue base relative to Samsung Foundry (and any other of its contract chip manufacturing peers, for that matter) allows it to be more aggressive about investing in research and development for future technologies.

Although I don't think TSMC's 10-nanometer yields right now are anything to write home about (on its most recent earnings call, management said that the first product to be built on its 10-nanometer technology has been "produced with reasonable yield" -- not the wording one would expect if yields were great), I strongly suspect that TSMC is further along on this front than Samsung is.

What Qualcomm may have done is implemented Snapdragon 830 in both Samsung's and TSMC's 10-nanometer processes, respectively. Qualcomm clearly has incentive to build the first Snapdragon 830 chips at Samsung as the former is eager to get its chips inside of the latter's flagship Galaxy S series smartphones.

Later on in the Snapdragon 830's life cycle, though, Qualcomm could dual-source the chips, ultimately selling Samsung-built Snapdragon 830 chips to Samsung and some mix of Samsung- and TSMC-built Snapdragon 830 chips to other flagship Android phone makers.

In this case, winning some of the Snapdragon 830 orders would be a win for TSMC, since it was completely shut out of the Snapdragon 820/821 generation.

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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends 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.