Apple would have bought TSMC’s entire 3nm production capacity for about a year. In return for the bulk orders, TSMC will bear the cost of failed chips.

Apple will most likely have near-exclusive access to TSMC’s 3nm process for the first year. The manufacturer would have bought all capacities for the production of its future own chips. Only after the first year can TSMC’s capacity be expanded to serve other customers.

Apple is TSMC’s largest customer and was responsible for 23 percent of the chipmaker’s revenue in 2022. The phone and laptop maker’s huge orders give TSMC security, which in return has to do something. The manufacturer bears the full risk of the production proceeds.

special treatment

Chips are baked together in the hundreds on a waffle and then cut loose. Chip manufacturing is a complex and very chemical process that doesn’t always go according to plan. Especially in the early days of a new process, not all chips in a wafer are equally good. Some don’t work, others don’t work with all cores or at the requested clock speed.

Usually that risk lies with the buyer who knows what to do with those inferior chips. Is your clock speed insufficient? Then they get a different name and are sold with different specifications at a cheaper price. Some cores not working? Then it is a quad-core chip and not an octa-core.

Apple has a different arrangement with TSMC: only chips that perform as desired are part of the order. TSMC bears the costs for the outages. This is very relevant as the yield of the 3nm process would only be 70 percent for now. In other words, 30 percent of the chips on a 3nm wafer are misbehaving.

Other customers

For other customers like AMD and Nvidia, the partnership between TSMC and Apple is bad news. The Taiwanese chip manufacturer builds processors and GPUs for them, but they still have to wait a while before they can buy a decent amount of 3 nm chips. Production remains expensive anyway and with the delay in availability caused by the agreement with Apple, 3nm will no longer be as unique at TSMC.

However, switching to the competition is not an obvious option. The chip design is done with a specific baking process in mind. A chip developed for TSMC must be drastically redesigned for production at Samsung or the new Intel Foundry Services, for example.