Exclusive: TSMC to Make Apple Chips on Trial

Taiwan's TSMC has started trial manufacturing of next generation A6 chips for Apple Inc, a source familiar with the matter said, in a sign that the iPad maker is shifting from its traditional chip supplier, Samsung Electronics.

Whether TSMC would get actual orders for the chips would depend on its yield rate, or the amount of chips per batch that come out with no defects, the source said on Friday.

Samsung is the sole supplier of the A5 chips used in the iPad 2, but Apple has hinted it is keen to diversify its supply chain from the Korean company. Samsung has emerged as Apple's toughest competitor in the smartphone and tablet market and is involved in an acrimonious legal battle with Apple over patents.

"TSMC has got all the authorization and details ready. Whether Apple puts in a formal order will depend on the yield rate," said the source, who was not authorized to speak to the media. The source did not provide further details of the orders.

TSMC spokeswoman Elizabeth Sun told Reuters she could not comment on this issue or on market rumors. Apple was not immediately available for comment and a Samsung spokesman declined to comment.

Analysts and other sources had previously said TSMC, the world's largest contract chip maker, was set to become a supplier of some processor chips to Apple, likely starting next year. However the chip may not be called A6, the sources said.

Shares of TSMC have slipped 1.5 percent so far this year, outperforming the broader market's 4.5 percent decline.

Some analysts expect Samsung to dominate A5 orders and said any switch by Apple could be tricky.

"It won't be easy for Apple to dramatically change its chip provider from Samsung," said Seo Won-seok, an analyst at NH Investment and Securities in Seoul.

"It has to redesign the chipset, which Samsung has been deeply involved from the beginning and has some intellectual property. Apple could try various suppliers but they (Samsung and Apple) need each other and the relationship will continue."

TSMC is an obvious candidate to win processor business from Apple in the near term as it budgets $7.8 billion for capital expenditures this year to update technology and add capacity. It also has experience with ARM architecture, widely used by Apple to make power-efficient mobile chips.

The A5 chip is designed by the California company and analysts say it is based on British chip designer ARM Holdings Plc's technology.

Bevan Yeh, a senior fund manager of Prudential Financial Securities Investment Trust, estimated that TSMC's earnings per share would be lifted by T$2 a year if it manages to win all orders for the A6 chip. The T$2 would mean a one-third boost to TSMC's EPS based on the company's 2010 earnings.

"Samsung will try everything it can and offer a very low price to save the orders," said Yeh, adding that Samsung, which had just built a new fab for Intel, might offer a price low enough just to cover the variable costs, or offer a bundled package that includes different components.

(Additional reporting by Miyoung Kim in SEOUL and Poornima Gupta and Noel Randewich in SAN FRANCISCO; Editing by Jonathan Standing and Anshuman Daga)