It’s no secret Apple and Samsung have a love-hate relationship.  Nevertheless, the Korean firm provides processors to the Cupertino company, powering its products such as A6 processors fitted to the iPhone 5 and iPad 4.

The agreement between Apple and Samsung for the production of mobile processors for the iPhone, iPad and iPod Touch is due to expire next year.  And you can safely bet that Apple is not going to renew the agreement. Digitimes Research reported that Apple will start transitioning away from Samsung as a processor supplier in next year, and will likely to stop sourcing altogether by 2014.

Single source of electronic components

Samsung for many years remained Apple’s largest supplier of electronic components – memory, processors, and displays.  Since Apple launched their mobile device lineup in 2007, Samsung has been providing processors, with the Cupertino company taking full advantage of Samsung’s capacity, marking mutual success.  Last year Apple shipped about 226 million processors in devices such as the iPad and iPhone, representing a 13.5 percent market share. The demand is expected to increase over the next 12 months.

However, in the last year and a half because of a patent conflict relationship between the two companies, their relationship has deteriorated to such an extent that the confrontations have forced Apple to find a new manufacturer for processors in its devices.  Last August Samsung was court-ordered to pay $1.05 billion in damages to the global IT giant for illegally copying some elements of the iPhone and iPad in its Galaxy S smartphones. Samsung pushed for a retrial, but was rejected on December 18 last year by the California judge handling the case.

How will it impact Samsung? 

Samsung generated $8.2 billion in revenue through its semiconductor business during the third quarter of 2012. Apple’s iPod, iPhone, and iPad, making up about 81 percent of processors Samsung made in 2012.

According to DigiTimes Research, as Android devices will continue to power more devices, Samsung’s processor orders are slated to grow more than 36 percent next year, and by 2014 Samsung’s capacity for own-brand devices will be up 270 percent compared to 2012, overtaking Intel as the largest supplier of application processors.

The potential loss of Apple’s application processor (AP) orders is unlikely to have a significant impact on Samsung’s logic IC operation.  According to the research, Samsung’s in-house capacity for APs currently fulfills only about 30 percent of the total demand for the firm’s own-brand smartphones and tablets, while the majority of Samsung’s AP production capacity satisfies demand for Apple’s iPhone and iPad devices. If Apple withdraws its orders, Samsung will have more available capacity to produce chips for its branded mobile devices in 2013.

Until now, Samsung’s own APs represent only 30 percent of its needs for its products. Samsung usually uses its processors in its high-end products including the Galaxy S3, S2 and Note 2, and uses various APs foundries products from Qualcomm, Nvidia, Broadcom, ST-Ericsson and Marvell for its other low range products.

Apple’s departure will force the Korean group to expand production of processors for its own needs, doubling its production for its own purposes in 2013 and continuing on a similar path in 2014.  A lost contract with Apple would allow Samsung to increase production from 105 million units in 2013 to 185 million units in 2014.

This may also mean that the other processor vendors may have fewer opportunities to sell their products powered by Samsung processors in the coming years.

Has Apple found Samsung’s replacement? 

If one believes the Taiwanese press, Apple has already signed a contract with TSMC (Taiwan Semiconductor Manufacturing Company) for the supply of A6X processors equipping the iPad. These have been manufactured by Samsung to date.

Introduced on the market last October, TSMC is the only supplier of chips engraved in 20 nm (for comparison, the processor of the iPhone 5 is dual core A6 and engraved in 32 nm).

If Apple goes through this transition plan, many analysts believe the company only has four options to turn to — TSMC, Intel, Global Foundries and Go Vertical.   Then again, Apple could very well stick with Samsung.

On the rebound

Intel, TSMC and Samsung have a viable shot at being selected as Apple’s next foundry partners.  TSMC clearly lacks the scale and leading-edge process level in order to compete in this league, while GlobalFoundries probably still has to prove itself following the public divorce from AMD.  TSMC is pulling out all the stops in order to win Apple’s business, including hiring teams of IC design and system level engineers, accelerating its 20nm process development.

Amit Daryanani of RBC Capital noted that Intel is seen as the less likely partner, due to Apple’s investment in the ARM architecture.  But Intel’s advantage here is that it controls its own manufacturing, and could gain traction in mobile simply because it can deliver the manufacturing goods.

Credit Suisse analysts are claiming that Apple could jump ship to TSMC’s 28-nanometer processors as early as the second quarter of 2013. TSMC’s 20nm process technology can provide 30 percent higher speed, 1.9 times the density, or 25 percent less power than its 28nm technology. The volume production is expected to start in the fourth quarter of 2013, raising the possibility that TSMC will hike capital expenditure to US$11-12 billion in 2013 and 2014.

Then again, Apple could make its own chips

According to a report by The Oregonian, Apple is highly motivated to take control of their own chip manufacturing, and is planning to invest billions of dollars to establish a dedicated chip fab in the city of New York.

The project, code named “Project Azalea,” revealed that New York state economic development officials have been asked to provide a 3.2-million-square-foot chip manufacturing factory to Apple for producing components for Apple’s iPhone and iPad. Two other states – California and Texas – are also believed to be in the running for “Project Azalea.”

The development in New York will ultimately serve Apple, whether it is their own manufacturing plant or one of their partners’.  Apple seems likely to consider building a dedicated plant for TSMC and produce the two hundred million mobile chips Apple requires each year, streamlining operations, global logistics and the quandary of long-term relationships.