iPhone 13: How Will Apple Respond to the Rising Cost of Chip Production?

iPhone 13 series prices may be higher than expected, a new report suggests. Apple is reportedly looking to increase the price tag on the iPhone 13 range to mitigate the impact of rise in chip-making costs. Taiwan Semiconductor Manufacturing Company (TSMC), Apple's leading chip supplier, is reportedly planning to increase the costs of its chip production. This will impact TSMC customers including Apple. While the new increased pricing is reported to come into effect in January 2022, Apple will reportedly sell its iPhone 13 series at a higher price tag to minimise the impact on profitability.

Why the new prices for chip production will impact Apple

In a research note cited by Business Insider, Barclays analyst Blayne Curtis has explained that the impact will be much lower on TSMC, since it only sells chips to Apple for use in the Apple iPhone. According to Curtis, Apple will likely increase the price of its Apple iPhone Xs, Apple iPhone Xs Max, and Apple iPhone Xr to mitigate the impact of TSMC's cost increases. According to a previous report, TSMC has raised the prices of its 3D Sensing technology to $12,000 per unit. According to Barclays, TSMC is planning to increase the costs of its manufacturing process by up to 50 percent in response to rising foundry component costs.


What are TSMC's new prices?

This pricing is likely to affect Apple and its iPhone 13 and iPhone 13 Plus, which are reportedly scheduled for a release in the latter half of 2019. According to a report in Nikkei Asian Review, TSMC will be raising the prices of its 7nm manufacturing process from $500 per 10-nanometer wafer to $700 per 10-nanometer wafer. iPhone pricing will also be affected as Apple has an exclusivity agreement with TSMC. In case of TSMC, this is the highest pricing change since the manufacturing company was acquired by Apple in 2013. The Taiwanese company's sales price had stayed at $500 per wafer since then. The new pricing will impact mobile phone makers such as Apple, Qualcomm and MediaTek as well as computer makers such as HP and Dell. We may not see an impact on TSMC's actual sales revenue.


What is Apple going to do about the higher price of the iPhone 13 series?

Reuters quotes an Apple supplier as saying that Apple is considering a price hike to compensate for higher chip costs. Apple would increase the prices of iPhone 13, iPhone XR, iPhone XS, and iPhone XS Max models in India. Apple iPhone suppliers are reportedly asking for an increase in TSMC's overall capital expenditure. This capital expenditure includes the investment for additional lines for producing chips, which will be required as TSMC faces rising chip costs. TSMC is reportedly in talks with Apple to increase its capital expenditure by about $1 billion in 2019, in order to help "maintain and raise the value of their capital and capacity". The increase in capital expenditure is likely to hit Apple's share of the production of the A12 chip in the iPhone 11 series.


Why we care about this news anyway?

As Apple's largest manufacturing partner, TSMC's increased pricing will be significant for the company. Apple relies on the company for the manufacture of its A-series processors, including the A-series 7 and A-series 8 processor. Apple also uses TSMC to manufacture its own processor cores - such as the A11. Apple has also reportedly entered into long-term supplier agreements with the company to ensure that it has access to TSMC's manufacturing capabilities as well as will not have to worry about sourcing its components from alternative sources. According to DigiTimes, which cited industry sources, TSMC is looking to raise its foundry fee, while reducing the output cost for its A11 processor to help offset the rising price of its 16nm FinFET manufacturing process.



iPhone 13 prices are going to be higher than expected and Apple is likely to sell iPhone 13 at a higher price to minimise the impact of rising chip prices. Overall, iPhone sales are going to remain strong during the period, as there will be a couple of full quarters of higher prices. Overall, this will help Apple's margins during the period. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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