TSMC is said to eat the cost of defective chips so it can keep Apple’s business.
It’s been rumored for several months now that Apple will be using a new 3 nm manufacturing process from Taiwan Semiconductor (TSMC) for its next-generation chips, including M3 series processors for Macs and the A17 Bionic for some next-gen iPhones. But new reporting from The Information illuminates some of the favorable terms that Apple has secured to keep its costs down: Apple places huge chip orders worth billions of dollars, and in return, TSMC eats the cost of defective processor dies.
At a very high level, chip companies use large silicon wafers to create multiple chips at once, and the wafer is then sliced into many individual processor dies. It’s normal, especially early in the life of an all-new manufacturing process, for many of those dies to end up with defects—either they don’t work at all, or they don’t perform to the specifications of the company that ordered them.
Normally, chip designers would have to pay for each individual die whether it worked or not; that’s a major reason why companies (including Apple) sell cut-down or “binned” chips that run at lower clock speeds or have parts switched off. That way, they can recover some money from a defective die instead of none. Apple’s orders with TSMC are apparently large enough that TSMC can afford not to charge Apple for unusable dies.
The savings can be quite substantial for a new manufacturing process. The Information says that roughly 70 percent of early 3 nm dies have been usable, though this number can change based on the chip being manufactured and does generally go up over time as processes are improved.
The Information says that Apple was responsible for 23 percent of the $72 billion that TSMC made in 2022, making Apple “by far TSMC’s largest customer.” Reports have been circulating for months that Apple has bought up all of TSMC’s 3 nm manufacturing capacity in the short term, and The Information reports that TSMC’s 3 nm technology will be exclusive to Apple for “roughly a year” before there will be capacity to allow any other companies to use it.
This deal has apparently been in place since Apple started using TSMC’s factories back in 2014 for the Apple A8 and the iPhone 6. For a time, Apple used multiple sources for its processors, using Samsung-made processors in some iPhones and TSMC-made chips in others. But all of Apple’s chips have been manufactured at TSMC for most of the last decade.
TSMC currently makes most of the high-performance CPUs, GPUs, and SoCs for most of the world’s biggest chip companies; Apple, Nvidia, AMD, and Qualcomm all use TSMC for their most advanced products, and many have switched from competitors like Samsung and GlobalFoundries in the past few years. Even Intel, which for most of its history has only made Intel-designed chips in its own factories, is relying on TSMC’s manufacturing for its Arc GPUs and some parts of its upcoming Meteor Lake processors, even as it tries to open its own factories to compete with TSMC for business from other chip designers.
Both Samsung and Intel are either shipping or preparing to ship 3 nm technology, though it’s hard to compare processes across different companies—they’re all using different underlying technology, and the Intel 3 process used to be called “5 nm,” just to give you some idea of how broad and hand-wavy a number like “3 nm” is. TSMC has had a lead over its competitors for a few years now, but that can change, and Apple could always threaten to go elsewhere if TSMC won’t keep giving Apple favorable terms.