Apple's (AAPL) iPhone 5 is the next touted product launch rumored for October, 2012. In my opinion, Qualcomm (QCOM), the expected sole supplier for the iPhone 5's discrete baseband may be having supply issues regarding this 28 nanometer chip.
China's First Financial Times reported that shortages in the 28 nm chips would delay the Apple iPhone 5 release --perhaps it is only rumor. As of the writing of this article, however, neither Apple nor Qualcomm has made an official statement regarding this news report.
While Qualcomm apparently is the sole supplier of the discrete baseband for Apple's iPhone 5, Qualcomm does not fabricate its own 28 nm chips. Qualcomm has stated that it is having 28nm chip supply issues and has sought assistance. During its earnings conference call, Qualcomm stated that it had chosen 4 suppliers for the 28 nm chips, for reasons set forth below these suppliers are presumably TMSC (TSM), UMC (UMC), Samsung (005930), and GlobalFoundries.
Qualcomm, during its earnings conference call, said through Steven M. Mollenkopf, President and Chief Operating Officer:
"The 28 nanometer right now, as I said, we're supply limited. So it's -- and it's going quite well in terms of bringing up additional sources. We actually have 4 sources that we're now bringing up. If you track through the calendar year, we're engaged with all of them now. And it's going the way that we had thought."
TMSC makes 28 nm chips for Qualcomm but may be experiencing production difficulties. TMSC said in its earnings conference call:
"[B]y fourth quarter , we will be nearly caught up with the demand and we expect to fully meet the demand from the first quarter of 2013 on we will fully meet the 28 nanometer demand."
On July 2, 2012, Taiwan Economic News reported that Qualcomm chose Samsung (SSNLF.PK) and United Microelectronics Corp. (UMC) as suppliers of 28 nm process capacity in addition to its primary source for 28 nm chips, TMSC. Although not expressly named, GlobalFoundries is believed to be the fourth supplier of 28 nm chips to Qualcomm.
The Taiwan Economic News reported:
"UMC will begin to produce Qualcomm's Snapdragon S4 processors and 3G/4G baseband chips using 28 nm process in the fourth quarter this year ."
Interestingly, Samsung likewise uses a 28 nm chip for its telephones, which are selling well. Samsung, a market competitor of Apple, is unlikely to forego its own supply needs to fulfill the 28 nm chip requirements of its competitor.
On July 5, 2012, Executive Vice President Mike Noonen of GlobalFoundries said in a blog post that its Fab 8 fabrication facility would be fully operational, and able to ship 28 nm product for revenue in early 2013. GlobalFoundries is speaking about bringing on a new fabrication plant for 28 nm chips in New York state.
During its earnings conference call, Qualcomm also stated:
[W]e have a significant demand for the 28-nanometer products. And as you get into the December quarter, you now have a tier of products on 28 nanometer, which, I think, is a big advantage for our portfolio. And they're moving forward. And you're essentially in a situation where demand is increasing and supply is increasing, and we're trying to match those 2 ramps.
Qualcomm plans on catching up with demand for 28 nm chips in late 2012 as shown by comments made during its earnings conference call, stating:
Looking ahead, while we are forecasting sequentially lower MSM shipments based on midpoints in the September quarter consistent with the pause and re-profiling of demand, we expect a strong December quarter as new high-tier smartphone devices launch for the holidays and we have an improved supply of 28 nanometer products.
When answering a question during its earnings conference call about $200 million in NREs, William E. Keitel, Qualcomm's Chief Financial Officer, Principal Accounting Officer and Executive Vice President, stated:
"Yes, the key components of that, foremost, is spending around 28-nanometer products, both the -- accelerating the supply as much as we could, but then also, there's been expansion in the products and the future road map for those products. That's number one. "
When clarifying the answer regarding the intensity of operation expenses, Qualcomm said:
"[i]t's unusual in respect that we've ramped the operating expenses even though we aren't able to ship all of our customer demand."
On April 19, 2012, Gene Munster of Piper Jaffray said that Apple's iPhone 5 would be released in October 2012 based on statements by Qualcomm of similar date. Clearly, Qualcomm has made a different statement when considering its earnings conference call of July 18, 2012.
Qualcomm says it will catch up in December 2012 with 28 nm chip demand which may be used in the Apple iPhone 5. UMC and GlobalFoundries state that production for Qualcomm of the 28 nm chip will begin in late 2012 or early 2013. TMSC states that it will get caught up with demand in December 2012.
Apple may be able to launch the iPhone 5 by October 2012 as Gene Munster of Piper Jaffray stated; however, how many units of the iPhone 5 will Apple have to sell? Where will Apple get the 28 nm chips if it does not get them from Qualcomm and its suppliers?
Even if 28 nm chips are available starting December 2012, Apple would be hard pressed to assemble or otherwise manufacture the iPhone 5, package and ship the new product to stores for launch the same month.
Perhaps Apple is not concerned about supplies of 28 nm chips whether for an October 2012 or December 2012 launch for reasons it has kept to itself, such as securing sufficient supply of 28 nm chips. All kinds of smartphones and tablets use the 28 nm chip, perhaps difficulties with supply of said chips may bypass Apple completely.
So the China's First Financial Times could be wrong or it could be right based upon review of earnings conference calls and news stories as outlined above.
All Apple or Qualcomm would have to do is say that sufficient 28 nm chips will be available to Apple for it to launch the iPhone 5 in October 2012 or any other date determined by Apple. Neither Apple nor Qualcomm has said something similar, at least that the author was able to locate as of the writing of this article.
Whether launching in October 2012 as rumored or December 2012 when a plentiful supply of 28 nm chips appears to be available, does Apple need to adopt a marketing strategy for the iPhone 5 as Heinz did for its ketchup, slow is good?
Apple sells few products and iPhone sales provide Apple significant revenue. Consumer products tend to be cyclical, and a company certainly books profits when a unit debuts or launches. Apple needs enough 28 nm chips to manufacture the iPhone 5. Based on earnings calls and other financial journalism, Apple is securing these 28 nm chips from Qualcomm which as set forth above is having issues supplying the same. As such Apple may again not meet expectations.
"Well, all I know is what I read in the papers." Will Rogers, New York Times, Sept 30 1923. News regarding Apple's planned launch date for the iPhone 5 and/or Qualcomm's ability to meet Apple's need for 28 nm chips would certainly be welcome.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.