Tim Cook, chief executive officer of Apple Inc., left, shares a toast with Morris Chang, founder of Taiwan Semiconductor Manufacturing Co. (TSMC), during a “First Tool-In” ceremony at the TSMC facility under construction in Phoenix, Arizona, US, on Tuesday, Dec. 6, 2022.
Caitlin O’Hara | Bloomberg | Getty Images
President Joe Biden’s big push to get more semiconductors made in the U.S. is designed with many broad economic and industrial policy aims — adding high-wage American jobs; securing supply of a key technology material with national security implications in a widening geopolitical-technological rivalry with China; revitalizing domestic manufacturing; and setting new terms for lucrative tax incentives with corporations.
But there’s another potential consequence: the CHIPS Act may also raise prices across a wide range of consumer electronics devices.
The $54 billion Chips and Science Act, signed by the president on Aug. 9, has been in the news because of the long list of rules the Biden administration proposed Feb. 28 to attach to applications for aid to build factories – everything from limits on foreign investment to stock buybacks, and requirements that chip companies provide child care to workers. So far, the law has spurred $200 billion of announced investment in U.S. chip manufacturing, the Semiconductor Industry Association said in December.
But analysts say one catch is that shifting manufacturing to the U.S. will raise the price of chipmaking — and, perhaps, the prices of popular devices that use chips, like smartphones and game consoles. Exactly how much prices might rise depends on how much companies, including Apple, Alphabet and Samsung, and other phonemakers, tweak designs, supply chains and processes to cut other costs, says CFRA Research analyst Angelo Zino.
How much of phone cost is in the chips
On its face, a significant hike in chip prices has implications for consumers because chips are such a big component in overall phone manufacturing cost.
About 54% of the estimated $527 manufacturing cost of an iPhone 14 Plus represents the cost of semiconductors in the phone, said Narinder Lall, who directs so-called “teardown analyses” of technology devices for Ottawa-based semiconductor information TechInsights. An estimated $81 of that represents the cost of the phone’s core A15 processor, designed by Apple and manufactured by TSMC, Lall said. Other chips in the world’s most ubiquitous electronic device run the iPhone’s communications and memory, he said.
Semiconductors comprise the biggest component cost of an iPhone, whose display screen costs about $64, with another $98 spent on cameras, which themselves contain chips made by Sony, TechInsights says.
The Tensor chip in the competing Google Pixel 7 phone costs $101, according to Lall. The phone’s camera costs an estimate $88.
For Samsung , the combined 5G modem and core apps processor add up to $193 of the $618 manufacturing cost of an S-22 Plus phone.
Figures in $USD
Some telecom executives are worried about a major increase in cost. Robert Morcos, CEO of Social Mobile, a provider of business mobile-communication services, cites estimates he has seen that the cost of chip making could rise by as much as 40%.
Using the iPhone as an example, that could equate to over $100 in new cost.
Bringing chip manufacturing to the U.S. is expensive in many respects. For starters, it’s more expensive to build operations and source labor and equipment.
Taiwan Semiconductor Manufacturing Company Chief Financial Officer Wendell Huang said on the company’s most recent earnings call that chip factories in the U.S. are far more expensive to build than in Taiwan, the leading source of chips today.
“The major reason for the cost gap is the construction costs of building and facilities, which can be four to five times greater for a U.S. fab versus a fab in Taiwan,” Huang said. “The high costs of construction includes labor costs, costs of permits, cost of occupational safety and health regulations, inflationary costs in recent years, and people and learning curve costs.”
A recent New York Times report on the CHIPS Act quoted a supplier to TMSC as saying the cost of an Arizona factory construction was “far beyond” his client’s expectation.
Debating how much an all-U.S. made iPhone might cost has been a parlor game for years, with claims that the cost could skyrocket as high as $30,000. But more mainstream analyses have concluded that the price would rise about $100 if the phone’s parts were all made in the U.S. And tech analysts thinking through the CHIPS Act implications say device manufacturers like Apple won’t pass along significant price hikes related to the cost of chips.
“Apple won’t increase the price of an iPhone by $100; they’re great at finding other ways to restrain costs,” Zino said.
While Apple, and Tim Cook in particular, is renowned for mastery of global technology logistics, Samsung might have more ability to control costs throughout the supply chain, according to Zino, because it’s believed to make phones in large part to provide a market for its giant chip and device display manufacturing businesses, which have historically generated significantly more profits than its hardware operations. “They control a bigger percentage of the supply chain than any other hardware company on the planet,” he said, and that means potentially more cost savings for consumers.
Apple’s hefty margins will help blunt any impact.
“We don’t expect Apple will fully transfer the possible chipset cost increase to the consumer side,” TechInsights senior director of smartphone strategies Linda Sui said, arguing that Apple’s nearly 40% hardware profit margins give it room to absorb chip price increases and hold iPhone wholesale price hikes this year to about 2%. “Given the strong user loyalty and stickiness of iPhone users…we expect the impact on the consumer side would be minimal,” Sui said.
The new law includes $39 billion in manufacturing incentives to offset some of the higher costs, according to the White House. Another $13.2 billion was allocated for research and development and workforce development. The law provides a 25% investment tax credit for capital expenses for manufacturing of semiconductors and related equipment.
Apple already designs products and chips in the U.S., Zino noted. And it has committed to get about a third of its chips made at Arizona plants that Taiwan Semiconductor Manufacturing Corp. is building, set to open beginning next year.
China and issues in reshoring tech supply chain
Apple’s move toward U.S.-made chips will take time, Zino said, because Apple has had to prod its partner to make its most advanced products in the states. The most advanced devices use 3-nanometer chips that TSM is not expected to produce in Arizona until 2026, but has been making in Taiwan since last year, he said.
“They will continue to use [offshore factories] for years to come to make the next-generation phones,” Zino said.
Apple did not respond to a request for comment, but CEO Tim Cook was asked by an analyst on a recent earnings call about whether it had studied the “elasticity of demand relative to small price increases” that could occur related to the CHIPS Act. Cook did not offer a direct answer. “We don’t know at this point exactly what that will be, but we’re all in, in terms of being the largest customer for TSMC in Arizona. I’m very proud to take part in that. That’s what I would say about that,” he said.
Apple’s moves to diversify away from China will be gradual because it needs to stay on good terms with the government in Beijing, said Jeff Fieldhack, a research director at Counterpoint Research. The world’s most valuable company makes an estimated 90% to 95% of iPhones in China, and got 43% of sales in fiscal 2023 from Greater China, including Taiwan.
“It’s a tough dance for Apple,” Fieldhack said.
Morcos says a top concern of his is the narrowness of the CHIPS Act. Without bringing related device manufacturing back to the U.S., such as device batteries, sensors, cameras, antennas, and hundreds of other components, the manufacturing process could require the most critical component to be produced stateside, then shipped overseas to be assembled with hundreds of other components into a device that is then shipped back to the U.S. for the American consumer.
Nonetheless, the work on planning U.S. factories is well under way. Samsung is considering $200 billion in U.S. investment in chips plants after committing to a $17 billion factory near Austin, Texas, with planning of up to 11 fabs in the area. Companies including Intel, Micron, Global Foundries and Qualcomm have also announced plans to expand manufacturing in the U.S.
To fulfill the act’s broader purpose of reshoring tech production, Morcos said, more action will be needed to lure plants that produce device batteries and the devices themselves.
“$54 billion is a ton of money,” O’Donnell said. “Adding that kind of money to the economy is going to affect the economy. But it’s a drop in the bucket compared to the other money that went around.”