Apple And Samsung Join Forces For iPhone 7

Following reports at the end of last year that Samsung’s manufacturing plant in Austin was working on the early batches of A9 system-on-chips (SoC) for the presumptively named Apple iPhone 7, it appears that the South Korean manufacturer will be the lead manufacturer for most, if not all, of the SoC components for Tim Cook’s next-generation smartphone.

One of Samsung’s key advantages in the process is its mastery of fabrication at 14nm (reports Re/Code, citing sources familiar with the matter). This allows more transistors to be packed into a smaller space, all while drawing less power. The attractiveness of those benefits for any smartphone should be clear.

Apple has previously worked with Samsung on the internals of various iPhones, but moved away from its arch rival to source a significant percentage of the A8 chips for the iPhone 6 and iPhone 6 Plus from the Taiwan Semiconductor Manufacturing Company. It is believed that 70% of the A8 chips came from TSMC, with Samsung providing the balance.

With the iPhone 7 presumably moving out of hand-built test models and starting down the fabrication stage for a September 2015 release, decisions around the companies to handle the components would be expected around this time. While Apple designs the hardware and chips inside its devices, it does rely on third-party manufacturers to meet the order requirements, which is where Samsung’s semi-conductor business comes in.

Samsung has two main fabrication plants, in South Korean and in Austin, Texas. Given Apple’s push for ‘made in America’ I would expect much of the A9 fabrication to go to the Lone Star State (or Samsung’s partner, Global Foundries, and its facility in Saratoga Springs NY).

While it might seem unusual for Apple to be dealing with Samsung while Samsung’s Galaxy range is in competition with the iPhone, it’s worth nothing that the two divisions in the South Korean company are poles apart in terms of performance. While the smartphone division is haemorraging cash Samsung’s semiconductor division is returning an increase in profits by supplying many components as part of the smartphone value chain.

An issue that this deal would raise is one of leverage. Previously with two companies able to fabricate the A8 chips, Apple would have been able to bargain from a position of relative strength - the two companies could be played off against each other. If Apple was to jump to 14nm, it would be beholden to a single manufacturer – Samsung – which could lead to some interesting negotiations in the medium- to long-term.

Given Tim Cook’s use of the supply chain as a strategic weapon, he will realise that he is handing over one of the economic levers on one of Apple’s most profitable portfolios. The gains from going to 14 nm must outweigh the political disadvantage this could create.

With the A9 going into production, the irony is that Samsung is turning a profit by using an Apple design (with Apple’s blessing, of course).

Both Samsung and Apple have refused to comment on the deal.

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