iPhone ‘boring’ upgrades: Where Apple spends hundreds of billions of dollars

Original link: https://www.latepost.com/news/dj_detail?id=1864

For many users, after the annual launch of a new generation of Apple products, the number that follows “iPhone” no longer means any visible upgrade, but simply means that another year has passed.

The same was true for last night’s press conference. Following the iPad and Apple Watch, Apple has also given up on innovation in the appearance of the iPhone. This is the fourth year that the iPhone 15 series has continued the main styling that started with the iPhone 12 series, with some minor adjustments: a slightly curved titanium alloy frame, a larger camera module, and a body that is 20g lighter (Pro and Pro Max). Version).


But where most microscopes can’t see clearly, Apple and its suppliers spent tens of billions of dollars.

By the end of next week, the first batch of consumers who order iPhone 15 Pro/Pro Max will use a 3-nanometer chip. The smallest component in this chip is only 12 silicon atoms wide – even a new coronavirus is wider than it. At least 30 times larger.

As the size of components used in chips becomes closer and closer to atoms, the capital investment required for each generation of progress is also increasing exponentially. From 4 nanometers to 3 nanometers, TSMC’s new investment alone exceeds US$20 billion.

At the press conference, Apple mentioned “chip”, “silicon”, “sensor”, “CPU” and “GPU” more than 50 times. A cell phone today has a million times more computing power than the navigation computer used to land on the moon more than 50 years ago.

Consumers will not feel much change. After all, we use our mobile phones every day to complete some complex calculations that Alan Turing and John von Neumann did not anticipate. On average, we watch 2 hours of short videos and watch 1.5 hours of short videos every day. Hours of WeChat, 30 minutes of information software, 30 minutes of movies and TV, and 21 minutes of online shopping.

Today, most people replace their mobile phones not for performance, but more for broken screens, aging batteries, and unsatisfactory consumer desires.

The only improvement that one or two generations of chip upgrades can bring to the mobile phone experience is that the battery life can be extended by dozens of minutes. But after ten years of continuous efforts, the chip manufacturing process can be reduced from 28 nanometers to 3 nanometers. This is a big enough change that artificial intelligence and autonomous driving are expected to move beyond science fiction.

Since its birth, smartphones have been cutting-edge technology—especially the main driving force for chip research and development. Chip manufacturing is too expensive. Only selling more than one billion smartphones a year is enough to build economies of scale, giving Tesla Motors and Nvidia graphics cards the opportunity to follow suit and use the latest technology.

In the past, Apple, Samsung, and Huawei competed fiercely in the high-end mobile phone market. Each company competed to install the most advanced chips, ensuring that the chip industry had sufficient investment to jointly promote technological advancement. However, the mobile phone industry has been in recession for several years, and Huawei has encountered obstacles due to non-commercial factors. There may not be a second mobile phone company using 3nm chips this year. “The Android mobile phone camp has thin profit margins and is increasingly unable to support the use of the most advanced chips in the first place.” A mobile phone industry analyst told LatePost.

In order to continue to advance chip manufacturing, metal processing, and display technology to persuade consumers to continue spending money, Apple spent US$26.3 billion on research and development and US$10.7 billion on customized production equipment last year. The suppliers we work with invest ten times that amount.

Ten times leverage, a $300 billion technology investment machine

When Apple CEO Tim Cook hosted his first earnings call in 2009, he was asked how Apple would operate without Steve Jobs. His answer at the time was, “We believe in owning and controlling the key technologies behind the products we make and entering only those markets where we can make a significant contribution.”

Cook officially took over Apple two years later and promoted investment in strict accordance with the answers at the time. He doesn’t have the legendary taste and inspiration of his predecessor, but he is willing to spend enough money to ensure that the company always uses and even promotes the latest technology.

According to disassembly estimates from institutions such as IHS Markit and Counterpoint Research, from the time Cook took over Apple to the release of the iPhone 14 Pro Max last year, the cost of components for the iPhone flagship model increased 1.5 times to US$464 – already surpassing competition from Samsung, Huawei and others. The average selling price of rival mobile phones.


The iPhone has almost reached the price of a luxury product, but Apple’s investment allocation is more like that of a manufacturing company. Every year, this company, which does not have its own factory, spends 63% of its hardware revenue on purchasing parts and manufacturing products, and more than 13% of its revenue on researching and developing new technologies and purchasing production equipment. Only a small portion of the expenditure is spent on advertising and distributing products.

According to International Business Strategies (IBS), just designing a 3-nanometer chip costs $590 million, more than twice as much as designing a 7-nanometer chip. In the past year, Apple’s R&D investment, plus capital expenditures such as purchasing equipment, cost US$37 billion.

The simultaneous increase in starting prices has helped offset the rising costs, ensured the profit margins of the iPhone business, and also allowed Apple to continue to develop new technologies and improve the competitiveness of the iPhone.

Suppliers responsible for turning new technologies, manufacturing processes or new materials proposed or researched by Apple into iPhone components invest more. In 2022, the R&D investment and capital expenditure of 137 listed Apple suppliers reached more than 300 billion US dollars.

More than one company has more annualized capital expenditures or R&D investment than Apple. For example, Samsung, Volkswagen and even Huawei spent more capital expenditures in 2019. However, Apple leverages industry chain investment by nearly ten times and inadvertently builds a huge There is no other technology investment alliance. Taking into account inflation, Apple and its suppliers invested enough last year to lead Oppenheimer’s team to develop the atomic bomb from scratch at least eight times.


Unequal investment relationship, difficult-to-reject customers

Technological research and development cannot compete with selling game skins. Only by continuous investment can we maintain a competitive advantage. Apple suppliers cannot tolerate failure, because they may have their orders diverted or even their supplies canceled just because they cannot keep up with Apple’s required production pace.

In 2013, after the sapphire glass company GTAT signed a nearly US$600 million cooperation agreement with Apple, it invested US$900 million to buy equipment and build the world’s largest sapphire glass factory. Because the final product did not meet Apple’s expectations, it failed to get orders. The company was immediately liquidated and the equipment was sold to pay off debts.

At the end of last year, Goertek, which has cooperated with Apple for more than ten years, lost orders for Apple’s AirPods Pro 2 headphones due to production problems. The company lost 15 billion yuan in market value within a month, and its fiscal year profits were directly halved.

Even TSMC, the world’s largest and most technologically advanced company, cannot stop and can only invest more and more resources to keep up with Apple’s pace and meet its process requirements. In the 10 years of cooperation with Apple, TSMC’s revenue has quadrupled, but its investment in research and development of chip manufacturing processes has also expanded at almost the same rate. Last year’s R&D investment and capital expenditure totaled more than 40 billion U.S. dollars, which is close to that of the whole of 2020. revenue.

The yield rate of TSMC’s 3-nanometer process is not at an ideal level, and some chips will be scrapped. Normally, customers would bear the cost of scrapping and pay more for each available chip. But TSMC has borne billions of dollars in yield losses to ensure that Apple can use new technologies this year.


Suppliers are willing to invest with Apple at any cost because Apple can “sustain” the industry cycle and bring them cash flow, market position and technical reserves.

After the 2008 financial crisis, companies generally cut spending, and TSMC did the same. TSMC founder Zhang Zhongmou immediately fired his successor Tsai Li-hsing, regained control of the company, and more than doubled TSMC’s expenses. Zhang Zhongmou knows very well that for the chip industry, which is highly technology- and capital-intensive, continuous huge investment is essential.

At that time, most of TSMC’s major peers were not so radical. Chang’s move pushed TSMC to the edge of a cliff financially. Sun Youwen, then head of investor relations at TSMC, said that when he heard about Chang’s plan, he “wanted to bang his head against the wall.”

In the end, it was Apple’s order that ensured that Zhang Zhongmou’s “radicalism” turned into “vision”. In 2010, Zhang Zhongmou received a call from Jeff Williams, who was Apple’s vice president of operations at the time, and eventually defeated Intel and Samsung with better conditions and lower prices to get the contract to manufacture chips for the iPhone. Opportunity.

After the transaction was completed, Zhang Zhongmou turned around and borrowed another US$7 billion to build millions of chip production capacity for Apple. Only this time, these investments are no longer like “bets” because the probability of winning has been infinitely magnified.

In 2017, TSMC surpassed Intel in manufacturing processes for the first time. When TSMC produced 7-nanometer chips for Apple in 2018, it took just over two months to achieve the production capacity that took more than 20 months six years ago. “Without Apple’s massive orders, it is unlikely that TSMC/Samsung will catch up with Intel in advanced chip manufacturing,” said Pushkar Ranade, a former R&D executive at Intel and Qualcomm.

Nowadays, fewer suppliers will say no to Apple due to commercial reasons. Before the COVID-19 epidemic, global consumer electronics was already weak, and only the consumption of the top 10% of the population was less affected. As its largest competitor Huawei temporarily withdraws from mobile phone competition due to non-market factors, iPhone sales continue to grow and capture more share.

According to data shared by market research firm Counterpoint Research to LatePost, the iPhone’s share of global smartphone sales has increased from 13% in 2019 to 18% in 2022. The agency predicts that 20% of sales and 49% of sales in the global smartphone market this year will belong to iPhone.


Chip technology is increasingly pushing its limits, but the same investment logic appears in more places

For most users, the chip computing power in mobile phones is redundant. In recent years, mobile phone manufacturers have tried their best to create demand for more and more advanced chips.

“In the past ten years, the question we faced was ‘Do we have a strong enough chip to achieve our ambitions?’ Now the question has become ‘Can we make better use of the chip?'” Jay, who has become Apple’s chief operating officer Jeff Williams said at a TSMC event in 2017.

He said that Apple is not worried about the semiconductor industry slowing down with performance redundancy, but believes that the future potential is huge. “More and more applications will be processed on local devices. This is to ensure responsiveness without sacrificing The best way to deliver powerful functionality with privacy and security.”

Williams took the example of the camera function launched by Apple at that time. The user pressed the shutter, the iPhone took hundreds of photos, and then used the chip to calculate and give the user a result. Many people think that their hands are more stable when taking photos. Catching up with the huge attention gradually attracted by artificial intelligence, Williams believes that “the world is at a turning point” and the development of computing power and artificial intelligence on devices will truly change the world.

In order to persuade consumers to continue spending money to buy products with stronger computing performance, Apple mainly demonstrated two functions: not connected to the Internet, local AI computing; better game graphics, including the realization that previous game consoles and dedicated game graphics cards can run smoothly. light simulation.

However, Apple is not confident that most iPhone users will accept paying more for this.

This year Apple can only equip the iPhone 15 Pro and iPhone 15 Pro Max with 3nm chips. The relatively cheap iPhone 15 and 15 Plus use last year’s 4nm chips. The new Apple Watch just uses technology from two years ago. A 3,000 yuan electronic watch cannot afford the most advanced chips.


Just three years ago, 5nm chips entered mass production and are the most advanced chip manufacturing process. Apple released the iPhone 12 in the same year. The entire series of mobile phones, Mac computers and iPad Pro all use 5nm chips. Only the Apple Watch remains on the 7nm process that was mass-produced in 2018.

As manufacturing becomes more difficult, the return on investment in R&D and production of more advanced process chips has been greatly reduced. Even Apple now only invests in products with the most lucrative profit margins. It’s hard to say how much more premium consumers are willing to pay for this year-on-year growth – which determines how long such investments can last.

Consumerism has reshaped our world over the past 80 years. When Silicon Valley first became Silicon Valley, the customers were clear and unique, and chips could only be sold to moon landings and war plans. The largest customers of advanced manufacturing in the world are now consumers, from mobile phone chips, to Tesla and CATL in the automotive industry, to the biopharmaceutical industry during the epidemic.

New technologies and solutions are often born out of challenges and difficulties – but the driving force behind their creation is often very simple – consumers who want a better experience, and companies who have the courage to invest in new technologies.

Title picture: Visual China

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