AI companies outbid Apple in battle for critical components

The result is a reversal of fortune for Apple. Parts manufacturers who previously bent over backward to please the tech giant now have enough business elsewhere to demand better terms. Experts predict Apple’s typically fat profit margins will get thinner this year, with consumers potentially facing the consequences down the road.

During Thursday’s earnings call, Apple’s head Tim Cook acknowledged the challenge. He told investors the company was struggling to secure adequate chip quantities while memory costs were climbing at a steep rate. His comments appeared to dampen investor enthusiasm for Apple stock, which remained unchanged despite exceptional iPhone revenue and the company posting its highest-ever earnings.

Sravan Kundojjala, an industry expert at research firm SemiAnalysis, put it bluntly that “Apple is getting squeezed for sure.”

A significant development came when Nvidia, the dominant player in AI processors, overtook Apple as the number-one client of Taiwan Semiconductor Manufacturing, known as TSMC. Nvidia’s leader Jensen Huang revealed this on a podcast. Apple had maintained a commanding lead as TSMC’s primary buyer for many years. TSMC produces the planet’s cutting-edge chips powering AI data centers, mobile phones, and various computing equipment.

Large-scale AI computers bear little resemblance to consumer smartphones, yet numerous manufacturers provide components for both categories. Memory chips have become especially scarce as organizations including OpenAI, Google under Alphabet, Meta, and Microsoft collectively invest hundreds of billions building out AI infrastructure.

Mike Howard from research firm TechInsights described the situation: “The rate of increase in the price of memory is unprecedented.” His analysis covers NAND flash storage chips that save pictures and clips, plus DRAM chips enabling quick application performance. TechInsights projects DRAM costs will reach four times their 2023 levels before year-end, with NAND surpassing triple.

Howard calculates Apple could face $57 in additional expenses for both memory types in the entry-level iPhone 18 launching this autumn versus the baseline iPhone 17 available now. For a handset priced at $799, such an increase would substantially cut into earnings.

Apple’s financial muscle and electronics design capabilities previously established it as an unbeatable heavyweight among Asian manufacturers producing iPhone components and assembling finished units. The company allocates billions annually just for NAND purchases, according to individuals with knowledge of the spending, positioning it as likely the globe’s largest individual purchaser.

Component makers eagerly pursued Apple contracts, aiming to capitalize on its technical expertise and brand recognition to land additional clients.

Times have changed, though. Ming-chi Kuo from TF International Securities observed: “the companies now pushing the boundaries of human-scale engineering are the ones like Nvidia.”

AI hardware demand outpaces Apple’s growth

Apple’s budget growth appears moderate when measured against the massive expenditures filling AI computing facilities, despite achieving record-breaking iPhone 17 sales.

South Korean manufacturers Samsung Electronics and SK Hynix are increasing what they charge Apple for a specific DRAM variant, say individuals connected to Apple’s supplier network. Major AI players offer generous compensation and commit to guaranteed purchases with advance funding, providing these chipmakers negotiating strength versus the iPhone producer.

While Apple establishes lengthy supply agreements for memory, it has exploited its market position to extract concessions from vendors. These contracts allowed Apple to renegotiate pricing as frequently as weekly intervals and even completely stop purchases from any supplier whose rates Apple considered unfavorable, say people aware of its procurement practices. Seeking additional bargaining power, Apple began stockpiling larger memory reserves. This represented a departure for Cook, who typically maintains minimal inventories to optimize the company’s available cash.

Apple’s competition extends beyond immediate component deliveries to securing engineers’ focus at manufacturing partners. Specialists in glass technology previously dedicated to perfecting ultra-smooth, lightweight phone screens now also devote hours to specialized glass materials needed for housing sophisticated AI processing chips, industry leaders indicate.

Producers of sensing devices and various iPhone internals are capturing fresh contracts from AI enterprises like OpenAI developing proprietary hardware.

Nevertheless, suppliers indicated they had no plans to walk away from Apple relationships. Partnering with Apple provides valuable learning experiences, they explained, since it continues ranking among the industry’s most exacting and methodical clients.