On Friday a source close to the matter reported that TSMC (Hsinchu, Taiwan), a semiconductor manufacturer, has begun trial manufacturing of next generation chips for Apple Inc's (Cupertino, Calif., U.S.A.) mobile devices, a sign that Apple is moving away from its long-time chip supplier, Samsung Electronics (Seoul, South Korea).
Samsung is the sole supplier of the A5 chips used in the iPad 2, but Apple has hinted that it wanted to move away from the Korean company. The two are battling a legal dispute over patents, and Samsung has also emerged as Apple's toughest competitor in the smartphone and tablet market.
Apple faces several hurdles should it want to make a switch to TSMC, including patents and chip design issues as well as a push by Samsung to retain the business.
"Apple is trying to diversify its orders but it will still maintain some kind of relationship with Samsung," said Fubon Securities analyst William Wang. "I think TSMC will get the new chip orders, the issue however is allocation. Apple won't give the whole 100% to TSMC. Maybe it'll allocate only 20-30%."
TSMC is an obvious candidate to win processor business from Apple as it has budgeted $7.8 billion this year to update technology and add capacity. It also has experience with the architecture of British chip designer ARM Holdings Plc, widely used by Apple to make power-efficient mobile chips.
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.
Shares of TSMC have slipped 1.5% so far this year, outperforming the broader market's 4.4% decline.
"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 requested anonymity on the grounds of not being authorized to speak to the media.
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.
The global semiconductor industry is set to grow by 7.2% this year, boosted by soaring sales of tablets and smart phones, research firm His iSuppli said.
The market for tablets, created only last year with Apple's iPad, is expected to surge to 108 million devices next year from an estimated 70 million in 2011 and just 17.6 million in 2010, according to research firm Gartner.
(Additional reporting by Miyoung Kim in SEOUL, Poornima Gupta and Noel Randewich in SAN FRANCISCO and Lee Chyen Yee in HONG KONG; Editing by Jonathan Standing and Anshuman Daga)