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How does slowing iPhone sales impact chip industry?

Robert Maire

iPhone replaced PC in chips, what can replace iPhone? A blip or a trend? Seasonality revisited...

Unless you have been marooned on a desert island for the last ten years you are aware that Smartphones, and in particular the IPhone has displaced the PC as the main driver of the semiconductor industry. Now that Apple has reported the first down quarter in 13 years and IPhone sales fell, what does this mean for the chip industry?
As inevitable as death and taxes......

Sooner or later iPhone sales had to slow as everybody and their dog has an iPhone and replaces it as quickly as they can, with every new release. Apple has invaded China, which was the last uncharted territory of growth for phones but we are quickly running of of hands to put phones into. When you are selling 50 million iPhones a quarter and employ a million people in China you are likely reaching an upper asymptotic bound.

iPhones drive the chip industry...
Just the buzz over who won the contract to provide the A8 or A9 processor was enough to drive TSMC and Samsung crazy. Who is winning what Apple modem business is driving Intel crazy.

The entire semiconductor ecosystem inside an iPhone can spell life or death for who wins the honor and privilege of supplying each chip for each function. Investors and analysts endlessly speculate because winning a socket inside the iPhone is like hitting the lottery. There really is no similar honor or competition for chip sockets in a PC.

iPhones drive the timing of the entire chip industry...
Everything in the chip industry revolves around the September release date of the next version of the iPhone. Chip makers know they have to get production ramped by June to get into the production flow. Fab lines have to be built and equipment ordered well before to hit the timeline.

The normal, previous holiday seasonality that already existed was amplified many times by Apple's September launches. It has become clear of the last few years that this seasonality replaced what used to be a longer cyclicality that was driven by both Moore's law as well as new new Windows versions (long since irrelevant )

Apple anointed the winner of the 10nm race...
Apple giving its next generation processor business to TSMC rather than splitting it with Samsung (perhaps because of that little power consumption issue or competition issue...) appears to have put TSMC in the leadership position at 10nm.

With an anchor tenant like Apple, its clear that TSMC has the confidence to spend money like a drunken sailor whereas without Apple behind it, Samsung has been much more gun shy about 10nm logic spending.

Because of this we think that TSMC will beat Samsung to both 10nm and 7nm volume. Even though Samsung still seems to have the Qualcomm business, that I guess is not the same as having Apple nor is it enough to get them the confidence to spend as heavily as perhaps they should.

I could even be so bold as to suggest that Apple even impacts EUV progress as TSMC seems less willing to take a risk on EUV at 7nm lest it delay that technology node. Samsung has less to lose if its late and also has perhaps more time to play around with a less then ready EUV technology. Getting chips to Apple on time is more important than using EUV to save a few dollars off of a well known, but expensive multi-patterning process for TSMC.

Does the Apple economic "trickle down" to the chip industry and semi equipment become a "dribble down" if iPhone sales slow?...
The impact of the downward spiral of PC sales is quite clear. Intel has done a very good job of mitigating the PC slow down but can't make up for it with other sales as the PC number is just too big. The trickle down impact to Intel's capex budget and thus the fortunes of the semi equipment companies who supply to Intel is also quite clear as Intel dropped from the number one spot in capex spending to the number three slot.

This is also one of the main reasons why we are looking at three flat years of capex spending in the semi equipment market (2014, 2015 & 2016...) as Intel's drop has offset increases by Samsung and TSMC.

Its only logical to assume that a similar slowing of IPhone and smartphone sales would have a similar trickle down impact through the chip and chip equipment industry.

A lower iPhone ASP means lower semi content...
As Apple goes down market in China and eventually India as those are the only real growth markets left, its clear that semi content in the iPhone will drop in value to get to a more affordable device.

This quarter saw the ASP of iPhones drop and not just because of the introduction of the new lower end IPhone.

Easy ways to cut the BOM cost of a phone are using less NAND, older processors or less capable modems etc;. Though Apple remains a premium brand, most all premium brands have low end products for other markets.

Whats the next driver of the semiconductor industry?
PCs were replaced by iPhone/ Smartphones. There is no clear replacement for iPhones. Internet of things is certainly not a boon for the chip industry. We are talking about a lot of cheap "jelly bean" chips made on trailing edge fab facilities, at best 28nm.

Wearables and Virtual Reality devices also do not appear to have high semiconductor value nor do they drive the bleeding edge. We will likely have to hope that this is more of a blip than a definitive trend as Tim Cook suggested.

Not so bad for Apple...
We think the stock reaction on the downside for Apple is going to be way overblown. The market clearly knew that iPhone sales were slowing just by the law of large numbers. The iPhone 6 and 6S were very strong performers making follow on sales even more difficult.

In our view there is likely more of a negative potential for suppliers to Apple, such as the semiconductor industry, than for Apple itself.

As has been pointed out by many analysts, Apple continues to mint money and is becoming more of a service related company. The "halo" of Mac and other sales driven by the iPhone success continues to grow.

Our guess is that even Apple itself is getting more seasonal and will have sales peak at its yearly new iPhone release only to swoon in the off season while consumers save their pennies to wait for the new iPhone to come out.

This seasonal cyclicality will also make the semi industry even more seasonally cyclical.

You can go back and read any one of our many articles in which we coined the term "seacyclical" (seasonally cyclical) to describe this new seasonally cyclical behavior.

The stocks..
Obviously Apple is going to get whacked but we would likely be buyers as we think it will recover and people will likely have this episode well in the rear view mirror when the iPhone 7 is released in the fall.

We also wouldn't be selling chip or chip equipment companies short on the Apple news but we would start to keep the concern of slowing chip sales due to slowing iPhone sales planted in the back of our mind as we invest, especially for the longer term positions as we think there is potential impact over time.
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The overall smartphone market is still growing modestly. This is a case of Apple losing share due to lack of innovation on it's part, and a commoditization of the smartphone market more generally. Samsung sales are holding up ok, and the Chinese vendors are gaining share. It's also notable that the Chinese vendors have moved up from the low end of the market and are now selling premium phones, which explains why Apple's share losses have been especially pronounced in China.

Forbes Welcome
Apple can no longer lag in technology, yet charge a premium to the product they market. Android is the predominant OS, and they are exploring the technological state of the art, while charging less. The days of Apple draining the profits out of the entire smartphone market are waning. Slow refresh cycles, lacking in compelling achievements, simply won't cut it any more.
Good point in this article that PC addressable market decline foreshadows what will happen when the mobile addressable market is smaller. No relief for equipment vendors.

iPhone SE is a pretty terrific bargain at $399. The comparable phone would be Nexus 5X, which offers terrific value itself; SE has the A9 chip which beats the pants off Snapdragon 808. I think Apple is staying right in step with where the market is heading (end of subsidies; $400 the new $650 price point; addressable market smaller due to less frequent upgrades). My prediction is Apple will maintain market share. The next version of the SE should be 4.5" or 5.0" though.
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I don't quite understand the emphasis on Apple in this context. With iPhone being just 15% of the smartphone market (and falling) Apple's role is not that big of a factor.
Benb , the sales number of the SE in china aren't great (10% of iPhone sales for a budget conscious country, only ~3 million preorders vs 16 million for xiaomi mi5), and it's now wonder: in the end most processors are good enough, but what matters for people are displays and the iPhone display isn't good enough - they're small and not that high resolution. And in china the price is $500. That's a lot when you can buy a very good xiaomi , starting at $150.

That leaves the question of status symbol. But will buying a small phone reflect status ? or just say you're budget conscious and don't have money to invest in a decent display ?

As for Apple selling a 5.0" phone for $400 ? interesting question. But not sure 4.5" would be enough. maybe.
Why would you compare the A9 to the outmoded S808? For the same price as the iPhone SE, which is an old 5C with a newer processor, you can get a far more advanced and capable S820 equipped Xiaomi Mi5. That is precisely the point I was making supra.
Xiaomi Mi5 looks impressive, they are also in step with the market trend toward $300-400 USD price point as the flagship. The lowest-priced model is about $300 USD with a lower-binned 820. That phone is only available in China or India though.

Compared to the flagship, these $400 flagship phones make a few compromises; Xiaomi makes the fewest I think. Samsung badly needs a Galaxy SE to avoid Apple's fate.
Xiaomi Mi5 looks impressive, they are also in step with the market trend toward $300-400 USD price point as the flagship. The lowest-priced model is about $300 USD with a lower-binned 820. That phone is only available in China or India though.

Compared to the flagship, these $400 flagship phones make a few compromises; Xiaomi makes the fewest I think. Samsung badly needs a Galaxy SE to avoid Apple's fate.

I thought Samsung was producing tons of budget models (unlike Apple). In fact, they are even leading in smartphone sales in India (a very price sensitive market).
Benb, the Mi5 is XIaomi's higher end. But even their low end , the Redmi note 3 is a great phone experience wise (with the 615, no lags unless maybe you're a heavy gamer, all day+ battery life) ,according to user reviews. And it's available for Europe(online) for around $190 i think. But not in the US.