Smartphone Vendors’ Pursuit of In-House Processors Puts Pressure on Shipments of Leading Mobile Chips Makers, Says TrendForce

Since 2014, global smartphone shipments have declined annually after enjoying a long period of high growth that began with the launch of the first iPhone. The latest analysis from global research firm TrendForce projects that smartphone shipments for 2016 will grow by just 7.3% year on year. This forecast may be subjected to downward corrections later.

Presently, the smartphone market is perfectly competitive, spurring vendors to vigorously find ways to differentiate their own products. According to TrendForce smartphone analyst Avril Wu, more and more smartphone vendors are investing in the development and production of their own application processors (AP). Designing processor chips in house has become one of the main strategies that vendors adopt to maintain their market shares and margins during this period.

“This rising trend of making APs in house will foremost benefit TSMC, the global leader in the semiconductor foundry business,” said Wu. “In order to get the best performance out of their in-house APs, smartphone vendors will line up to use TSMC’s leading-edge 16nm technology to manufacture their chips. Their contracts with the foundry giant may even include the use of integrated fan-out wafer-level packaging (InFO WLP) technology. With the semiconductor market evolving rapidly, TSMC’s client base will continue to shift, from the initial customers such as AMD and NIVIDIA to AP leader Qualcomm and then to major smartphone vendors including Apple and Huawei during these two years.

Below is an analysis of several major smartphone vendors that have been developing their own APs and their respective reasons for pursuing this strategy:

Apple: Leading the optimization of hardware-software integration

Apple’s strategy is based on maintaining the highest level of hardware-software integration. Hence, Apple develops its own APs for iPhones and over the years has become exceptional in hardware-software co-design for its mobile devices. This advantage makes Apple the leader of the industry as its products are the best in overall performance as well as user experience, even though some of iPhone’s key components (e.g. memory, display and camera) are not of highest specs.

Samsung: Manufacturing smartphone chipsets not only gets rid of excess capacity of its foundry unit but also helps the company gain IC design experience

In addition to leading in the smartphone market share, Samsung has established its own line of APs known as Exynos to power its products. According to TrendForce’s projection, Samsung will ship 323.5 million smartphones this year, while the shipments of Exynos chips are estimated to reach around 50 million units. Thus, the share of Samsung smartphones carrying in-house APs will be around 20%, which is a step toward the gradual reduction of buying chips from outside suppliers.

Huawei: Developing APs can improve bargaining power and reduce vendor’s dependence on Qualcomm and MediaTek

Smartphone vendors that achieved a certain level of economies of scale, such as those being capable of shipping at least 40~50 million devices a year, will benefit from designing their own APs. This strategy will help stem the reliance on IC design companies, including Qualcomm, MediaTek and Spreadtrum. The most immediate impact of the strategy can be seen in the price negotiation in the smartphone chipset market. Huawei, for instance, is able to use its IC design subsidiary HiSilicon to put pressure on Qualcomm to obtain better prices. Additionally, HiSilicon also helps Huawei improve its hardware-software integration, leading to a win-win scenario.

ZTE: Establishing a semiconductor unit to get backing from China's National Integrated Circuitry Fund

In these two years, China has been aggressively building a domestic semiconductor sector and supported various deals and ventures such as ZTE Microelectronics, a subsidiary of a local telecommunication equipment provider and mobile phone vendor ZTE Corporation. ZTE Microelectronics, which specializes in the development of APs, has sold a 24% stake of the company to the National Integrated Circuit Industry Investment Fund in exchange for a RMB 2.4 billion investment. Thus, the chip company is expected to have an important role in the implementation of China’s semiconductor policy.