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I don't think that's true. If my BOM costs go down by 10%, I don't need to charge any less money for my product. If Apple could build an iPhone for 1 cent, wh

I don't think that's true. If my BOM costs go down by 10%, I don't need to charge any less money for my product. If Apple could build an iPhone for 1 cent, why wouldn't they still charge $1000 for it? They can say it's how much iOS costs or whatever. (And hey, use the extra profit to hire more tax-paying iOS developers, making iOS even more valuable.)

cjrp 3y ago
I think the point is why has revenue dropped 10% for TSMC if everything downstream is going gangbusters? Doesn't it point to a drop in demand for chips, and therefore the retail devices they go inside?
- gtirloni 3y ago
  If downstream things have gone to shit already, why the prediction that a crisis will be in the _future_? TSMC's revenue grew too much during the pandemic. It's just normal it should contract when things go back to normal.
  - cjrp 3y ago
    Potentially this is a tipping point for the things downstream. Honestly I’m just thinking out loud here.
- nyokodo 3y ago
  > Doesn't it point to a drop in demand for chips Yes, but in isolation it isn't evidence of an economic downturn in general. It is evidence of the whiplash of consumer demand shifting during COVID from services to goods and back again along with the cost of retooling the industrial plant to match that demand. There's a range of ripple effects across industries that will be ongoing for some time.
- HWR_14 3y ago
  During COVID, with chip shortages, everything downstream bought as many chips as they could get. Now they have stockpiles to work through.
memen 3y ago
> If Apple could build an iPhone for 1 cent, why wouldn't they still charge $1000 for it? Cause in healthy capitalism, a competitor could step in and sell it for $999 and Apple would lose market share quickly.
- adventured 3y ago
  > Cause in healthy capitalism, a competitor could step in and sell it for $999 and Apple would lose market share quickly. No they can't. You're neglecting the various moats that an entity like Apple enjoys with the iPhone. First you have to be able to actually build a similar or superior product. You can't do it. Elite of elite tech engineering companies like Samsung can just barely keep up generation after generation. The investment required to build your $999 competing phone is comically enormous. You won't even be able to get access to enough chips to do it, much less have the manufacturing capacity to deliver at any meaningful scale given the components. Do you have tens of billions of USD in cash ready? You need to build a brand that consumers desire, such that they'll even want to spend $899 or $999 instead of picking up the iPhone at $1000. Do you have another block of tens of billions of USD in cash ready, for marketing, brand building, advertising? You need an extraordinary logistics system globally. Do you have another block of tens of billions of USD in cash ready to build, deploy, refine your global logistics network? Apple has ~$114 billion in annual operating income, most of it (including its ecosystem) is riding on the back of the iPhone. If it could be done, somebody would take that giant pot of gold from them. Even if a competitor could take 1/4 or 1/2 of that pot of gold, they'd move on it in a heartbeat. They can't do it, not even remotely close. And then time. It'll take you a decade to get there, absolute best case scenario. What Apple is reaping, is decades in the making, and required hundreds of billions of dollars in capital to be deployed over that span of time. Good luck.
  - pdonis 3y ago
    > You're neglecting the various moats that an entity like Apple enjoys with the iPhone. A world in which Apple could build iPhones for 1 cent would be a world in which those moats did not exist.
adamc 3y ago
The assumption is that the lowered revenue means fewer chips, rather than cheaper, less profitable chips. I don't know whether that is true or not. Might be a bit of both.
esdott 3y ago
Typically, lower demand means lower prices - at least in the short term. I believe that TSMC is saying that demand is decreasing quickly and a supply glut will need to clear until it gets better. Just my two cents.
- panarky 3y ago
  >> If Apple could build an iPhone for 1 cent ... ... then Samsung can also make a phone for 1 cent, and they might try to steal share by selling for $400, and some consumers would switch, etc.
sumtechguy 3y ago
In economics the closer you get your price to be MR=MC the better off your profit. If they did as you said more than likely they would be leaving money on the table. This is usually a fairly common intro economics problem as it can seem unintuitive to lower the price to make more profit. Now iPhones do have somewhat of a 'monopoly' effect. But only to a point. In a monopoly you want MC=MD. https://openstax.org/books/principles-economics-3e/pages/9-2-how-a-profit-maximizing-monopoly-chooses-output-and-price#CNX_Econ_C09_007 https://openstax.org/books/principles-economics-3e/pages/9-2... Apple falls in the middle of those two axioms. If Apple could pull of an iPhone for 1 cent there would be a flood of entrants into the market doing the same thing as making the things would be cheap and easy. At first some would pay the premium (pay for the name) but after awhile that premium would erode and it would seem odd to pay when you can get the same thing for wildly less money.
- mrDmrTmrJ 3y ago
  Respectively, plenty of companies can build a smartphone for far, FAR less than the sale price of an iPhone. E.g. a $50-$130 Samsung Galaxy A03. It's Apples install base, app ecosystem, and social moat (iMessage) allows continued high gross margins on their hardware and locks competition away from their profit center. The sale price has very little to do with the marginal cost of production and a ton to do with a naturally occuring software monopoly.
  - fshbbdssbbgdd 3y ago
    That Samsung uses the 12nm node, so you could say it falls somewhere between iPhone 7 (16nm) and iPhone (10nm). Those are worth about $100 used. A lot of the cost of manufacturing cost of cellphone parts comes from upfront capital expense, which is paid off by new models. This allows a strategy of selling cheaper, lower-end models using that old equipment. Apple also pursues this strategy, but they don’t push it nearly as far as Samsung. The cheapest iPhone, the SE 3 at $430, has a 5 nm chip in it, which they only released two years ago. Apple just isn’t willing to release a parts-bin device, because they have a high quality bar. This is part of a moneymaking strategy, but my point is you can’t compare the A03 price to any current iPhone model. Apple’s hardware margin is 35%, that is a reasonable estimate of the premium Apple is charging over a totally generic phone.
HWR_14 3y ago
Apple has moats around the mobile space far greater than the moats in, say, cars or washing machines.

cjrp 3y ago

I think the point is why has revenue dropped 10% for TSMC if everything downstream is going gangbusters? Doesn't it point to a drop in demand for chips, and therefore the retail devices they go inside?

gtirloni 3y ago
If downstream things have gone to shit already, why the prediction that a crisis will be in the _future_? TSMC's revenue grew too much during the pandemic. It's just normal it should contract when things go back to normal.
- cjrp 3y ago
  Potentially this is a tipping point for the things downstream. Honestly I’m just thinking out loud here.
nyokodo 3y ago
> Doesn't it point to a drop in demand for chips Yes, but in isolation it isn't evidence of an economic downturn in general. It is evidence of the whiplash of consumer demand shifting during COVID from services to goods and back again along with the cost of retooling the industrial plant to match that demand. There's a range of ripple effects across industries that will be ongoing for some time.
HWR_14 3y ago
During COVID, with chip shortages, everything downstream bought as many chips as they could get. Now they have stockpiles to work through.

memen 3y ago

> If Apple could build an iPhone for 1 cent, why wouldn't they still charge $1000 for it? Cause in healthy capitalism, a competitor could step in and sell it for $999 and Apple would lose market share quickly.

adventured 3y ago
> Cause in healthy capitalism, a competitor could step in and sell it for $999 and Apple would lose market share quickly. No they can't. You're neglecting the various moats that an entity like Apple enjoys with the iPhone. First you have to be able to actually build a similar or superior product. You can't do it. Elite of elite tech engineering companies like Samsung can just barely keep up generation after generation. The investment required to build your $999 competing phone is comically enormous. You won't even be able to get access to enough chips to do it, much less have the manufacturing capacity to deliver at any meaningful scale given the components. Do you have tens of billions of USD in cash ready? You need to build a brand that consumers desire, such that they'll even want to spend $899 or $999 instead of picking up the iPhone at $1000. Do you have another block of tens of billions of USD in cash ready, for marketing, brand building, advertising? You need an extraordinary logistics system globally. Do you have another block of tens of billions of USD in cash ready to build, deploy, refine your global logistics network? Apple has ~$114 billion in annual operating income, most of it (including its ecosystem) is riding on the back of the iPhone. If it could be done, somebody would take that giant pot of gold from them. Even if a competitor could take 1/4 or 1/2 of that pot of gold, they'd move on it in a heartbeat. They can't do it, not even remotely close. And then time. It'll take you a decade to get there, absolute best case scenario. What Apple is reaping, is decades in the making, and required hundreds of billions of dollars in capital to be deployed over that span of time. Good luck.
- pdonis 3y ago
  > You're neglecting the various moats that an entity like Apple enjoys with the iPhone. A world in which Apple could build iPhones for 1 cent would be a world in which those moats did not exist.

adamc 3y ago

The assumption is that the lowered revenue means fewer chips, rather than cheaper, less profitable chips. I don't know whether that is true or not. Might be a bit of both.

esdott 3y ago

Typically, lower demand means lower prices - at least in the short term. I believe that TSMC is saying that demand is decreasing quickly and a supply glut will need to clear until it gets better. Just my two cents.

panarky 3y ago
>> If Apple could build an iPhone for 1 cent ... ... then Samsung can also make a phone for 1 cent, and they might try to steal share by selling for $400, and some consumers would switch, etc.

sumtechguy 3y ago

In economics the closer you get your price to be MR=MC the better off your profit. If they did as you said more than likely they would be leaving money on the table. This is usually a fairly common intro economics problem as it can seem unintuitive to lower the price to make more profit. Now iPhones do have somewhat of a 'monopoly' effect. But only to a point. In a monopoly you want MC=MD. https://openstax.org/books/principles-economics-3e/pages/9-2-how-a-profit-maximizing-monopoly-chooses-output-and-price#CNX_Econ_C09_007 https://openstax.org/books/principles-economics-3e/pages/9-2... Apple falls in the middle of those two axioms. If Apple could pull of an iPhone for 1 cent there would be a flood of entrants into the market doing the same thing as making the things would be cheap and easy. At first some would pay the premium (pay for the name) but after awhile that premium would erode and it would seem odd to pay when you can get the same thing for wildly less money.

mrDmrTmrJ 3y ago
Respectively, plenty of companies can build a smartphone for far, FAR less than the sale price of an iPhone. E.g. a $50-$130 Samsung Galaxy A03. It's Apples install base, app ecosystem, and social moat (iMessage) allows continued high gross margins on their hardware and locks competition away from their profit center. The sale price has very little to do with the marginal cost of production and a ton to do with a naturally occuring software monopoly.
- fshbbdssbbgdd 3y ago
  That Samsung uses the 12nm node, so you could say it falls somewhere between iPhone 7 (16nm) and iPhone (10nm). Those are worth about $100 used. A lot of the cost of manufacturing cost of cellphone parts comes from upfront capital expense, which is paid off by new models. This allows a strategy of selling cheaper, lower-end models using that old equipment. Apple also pursues this strategy, but they don’t push it nearly as far as Samsung. The cheapest iPhone, the SE 3 at $430, has a 5 nm chip in it, which they only released two years ago. Apple just isn’t willing to release a parts-bin device, because they have a high quality bar. This is part of a moneymaking strategy, but my point is you can’t compare the A03 price to any current iPhone model. Apple’s hardware margin is 35%, that is a reasonable estimate of the premium Apple is charging over a totally generic phone.

HWR_14 3y ago

Apple has moats around the mobile space far greater than the moats in, say, cars or washing machines.