Apple’s “sweetheart deal” with TSMC is saving it billions on new chips

The new iPhones are coming next month, and it is bringing a new processor – A17 Bionic – at least the Pro models, and it is expected to be the most powerful among all smartphones.

The credit goes to Taiwan Semiconductor Manufacturing Company (TSMC), which is responsible for producing all of Apple’s custom chips. They have developed a new manufacturing process for smaller, faster, and more energy-efficient chips known as 3 nanometer. Apple will be the first company to receive these 3-nanometer chips from TSMC, almost a year before they are available to other companies.
TSMC’s 3nm node process has achieved a 70% yield rate, which is lower than the typical 99% yield rate in their current process nodes. However, this is expected as it is the first year of production for the new process node.

Usually, chip designers pay the cost of producing faulty chips. So, if a die is defective, the chip designer has to bear it, and in this case, Apple will have to pay for the bad produce. However, in a mutually beneficial “sweetheart deal,” Apple and TSMC have entered into an agreement where the latter absorbs the costs associated with defects that may arise during the new manufacturing process.
According to The Information, TSMC will not bill Apple for the entire cost of a wafer with hundreds of processors. Typically, the clients are the ones to pay for the wafer and its dies, even the defective ones. However, this situation is quite unusual. Instead, they will only charge for the “known good dies,” referring to the chips that pass the quality checks. This means that Apple will not be billed for the chips that fail to meet quality standards.
It has been reported that Apple has secured this year’s entire 3nm production of TSMC. This exclusivity will last for approximately a year until there is enough capacity for other TSMC customers to manufacture their own 3nm chip designs. It is believed that Apple contributed 23% of TSMC’s profits last year, which amounted to $72 billion.
The report states that TSMC’s ability to create newer technologies is due to Apple’s willingness to order new processors early and in large quantities. Therefore, Apple is assisting in the funding of 3nm processor development. Once the failure rate improves and TSMC’s capacity increases, it will be able to sell 3nm processors to other companies without the same exclusive agreement as Apple.