The Cost of Smartphones Could Increase if Chips are Manufactured in the US

President Joe Biden's major push to increase the production of semiconductors in the United States is intended to achieve a number of broad economic and industrial policy goals, including 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 establishing new terms for lucrative tax breaks with corporations.

‍

But, there is another possibility: the CHIPS Act may boost costs on a wide range of consumer electronics goods.

‍

The $54 billion Chips and Science Act, which the president signed on August 9, has made headlines due to the extensive set of regulations that the Biden administration proposed on February 28 to be attached to requests for aid in the construction of factories. These regulations range from restrictions on foreign investment to stock buybacks and mandates that chip companies provide child care for employees. According to the Semiconductor Industry Association's report in December, the law has so far encouraged $200 billion in announced investments in American semiconductor production.

‍

But according to experts, there is a drawback: moving production to the United States would likely increase the cost of producing chips, which might therefore increase the cost of popular chips-using products like smartphones and gaming consoles. According to CFRA Research analyst Angelo Zino, the precise amount that prices might increase will depend on how much businesses, such as Apple, Google, Samsung, and other phonemakers, modify designs, supply chains, and procedures to reduce other costs.

‍

How much money did your phone cost?

‍

On the surface, a major increase in chip costs would affect customers because chips account for a sizable portion of the cost of producing a phone.

‍

According to Narinder Lall, who oversees so-called "teardown analysis" of technological products for Ottawa-based semiconductor intelligence company TechInsights, the cost of semiconductors in an iPhone 14 Plus accounts for around 54% of the estimated $527 production cost of the phone. According to Lall, the core A15 CPU for the phone, created by Apple and produced by TSMC, costs around $81 of that total. The iPhone's memory and communications are handled by different processors in the most widely used electronic gadget in the world, he said.

‍

According to TechInsights, the most expensive component of an iPhone is its semiconductors, which cost roughly $64 for the display screen and $98 for the camera, which also contains Sony chips.

‍

According to Lall, the Tensor chip in the rival Google Pixel 7 phone costs $101. The camera on the phone is estimated to cost $88.

‍

For Samsung, the $618 production cost of an S-22 Plus phone includes $193 for the 5G modem and $193 for the core applications processor.

‍

TechInsights

‍

Some telecom executives are concerned about a significant cost hike. According to estimations Robert Morcos, CEO of Social Mobile, a supplier of corporate mobile communication services, has seen, the price of manufacturing chips might increase by as much as 40%.

‍

It may translate to a new price of over $100 for an iPhone, for instance.

‍

In many ways, bringing chip production to the US is expensive. To begin with, building operations and acquiring staff and equipment are more expensive.

‍

Firm that manufactures semiconductors in Taiwan

‍

On the company's most recent earnings call, Chief Financial Officer Wendell Huang said that building chip plants in the United States is significantly more expensive than in Taiwan, the world's largest supplier of chips at the time.

‍

The construction expenses of buildings and infrastructure, which can be four to five times more for a U.S. fab versus a fab in Taiwan, are the main cause of the cost difference, according to Huang. "The high costs of construction include labor expenses, permit costs, costs associated with occupational safety and health standards, costs associated with recent inflation, and costs associated with people and learning curves."

‍

The cost of building an Arizona facility was "way over" his client's expectations, according to a supplier to TMSC, according to a recent New York Times article on the CHIPS Act.

‍

Debate over the cost of an all-U.S. It's been a popular joke for years that the price of an iPhone may increase to $30,000 one day. The price would increase by around $100 if the phone's components were entirely produced in the United States, according to more widely accepted studies. Yet according to tech experts considering the CHIPS Act's effects, gadget makers like Apple won't pass along major price increases connected to the cost of processors.

‍

Apple is excellent at finding alternative methods to contain expenses, so they won't raise the price of an iPhone by $100, Zino asserted.

‍

According to Zino, Samsung may be better able to control costs throughout the supply chain than Apple, despite the fact that Apple, and Tim Cook in particular, is renowned for mastering global technology logistics. This is because Samsung is thought to make phones primarily to supply a market for its massive chip and device display manufacturing businesses, which have historically generated significantly more profits than its hardware operations. More than any other hardware firm on the globe, he claimed, they have more control over the supply chain.

‍

Apple's high profit margins will mitigate any effects.

‍

TechInsights senior director of smartphone strategies Linda Sui said, "We don't expect Apple will fully transfer the potential chipset cost increase to the consumer side." She argued 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%. We anticipate that the impact on the consumer side will be low given the high user loyalty and stickiness of iPhone customers, Sui added.

‍

According to the White House, the new law offers $39 billion in industrial incentives to help offset some of the increased prices. For research and development as well as workforce development, an additional $13.2 billion was set aside.

‍

The statute offers a 25% investment tax credit for costs incurred in the production of semiconductors and associated machinery.

‍

According to Zino, Apple already develops its goods and processors here. Also, it has agreed to have nearly a third of its chips manufactured in Arizona facilities being built by Taiwan Semiconductor Manufacturing Corp., which will start operating early in the following year.

‍

Issues with China's reshoring of the IT supply chain

‍

Because Apple has had to push its partner to produce its most cutting-edge goods in the US, Zino predicted that the transition to American-made processors will take some time. The most cutting-edge gadgets require 3-nanometer chips, which TSM has been producing in Taiwan since last year but is not likely to do so in Arizona until 2026, according to him.

‍

In order to produce the next-generation phones, "they will continue to use [offshore facilities] for years to come," Zino said.

‍

Apple declined to comment, although CEO Tim Cook was questioned on a recent earnings conference by an investor if the company had looked at the "elasticity of demand relative to tiny price hikes" that would arise as a result of the CHIPS Act. Cook did not directly respond. We don't yet know the particular details, but we are all committed to become TSMC's biggest customer in Arizona. Being a part of it makes me really proud. I would say something about that," he replied.

‍

Apple will gradually diversify its business away from China because it has to maintain strong relations with the Beijing government, according to Jeff Fieldhack, research director at Counterpoint Research. 90% to 95% of iPhones are reportedly made in China, and Greater China, including Taiwan, accounted for 43% of revenues for the most valuable corporation in the world in fiscal 2023.

‍

For Apple, it's a difficult dance, Fieldhack added.

‍

Morcos expresses worry about the CHIPS Act's narrowness. Without bringing back related device manufacturing, such as device batteries, sensors, cameras, antennas, and hundreds of other components, the manufacturing process may require the most critical component to be produced in the United States, then shipped overseas to be assembled with hundreds of other components into a device that is then shipped back to the United States for the American consumer.

‍

But, planning for US plants is already well underway. After committing to a $17 billion facility close to Austin, Texas, with plans for up to 11 fabs in the region, Samsung is considering investing $200 billion in U.S. chip manufacturing facilities. Further announcing intentions to increase production in the United States are businesses including Intel, Micron, Global Foundries, and Qualcomm.

‍

Further action will be required to entice factories that create device batteries and the devices themselves in order to achieve the act's larger goal of reshoring tech production, according to Morcos.

‍

O'Donnell remarked, "$54 billion is a lot of money. It will have an impact on the economy to add that much money. Yet compared to all the other money that was distributed, it is a drop in the ocean.