For years, Apple has dominated the electronics supply chain. However, the landscape has now shifted.
Artificial intelligence companies are pouring vast sums into purchasing chips, memory, specialized glass fiber, and other products, and have begun to outpace Apple in the race to secure core components. Suppliers once accustomed to catering to Apple's every demand have now gained the bargaining power to demand higher prices from the iPhone maker.
Analysts state that Apple's traditionally robust profit margins will face pressure this year, and consumers may ultimately feel the impact.
CEO Tim Cook addressed this issue during Thursday's earnings call, mentioning that Apple is facing chip supply constraints and significant price increases for memory. Despite record iPhone sales and the company posting record profits, these remarks appeared to put pressure on Apple's stock, leaving its share price relatively flat.
"Apple is indeed being squeezed," said Sravan Kundojjala, an analyst covering the industry for the research firm SemiAnalysis.
Jensen Huang, CEO of AI chip leader Nvidia, stated in a podcast that Nvidia has recently become the largest customer of Taiwan Semiconductor Manufacturing Company (TSMC). For many years, Apple had been TSMC's biggest customer, and by a significant margin. TSMC is the world's leading advanced chip manufacturer, producing chips for AI servers, smartphones, and other computing devices.
Spokespeople for both Apple and TSMC declined to comment.
The large computers handling AI tasks look vastly different from the smartphones in consumers' hands, but numerous companies supply components for both. As companies like OpenAI, Google, Meta, and Microsoft collectively invest hundreds of billions of dollars to build AI computing capacity, shortages in memory chip supply are becoming increasingly apparent.
"The magnitude of memory price increases is unprecedented," said Mike Howard, an analyst at research firm TechInsights. This applies to both NAND flash memory chips, which store photos and videos, and DRAM, which enables applications to run quickly. TechInsights forecasts that by the end of this year, DRAM prices will have tripled from 2023 levels, while NAND prices will have more than doubled.
Howard estimates that for the base model of the iPhone 18 expected this autumn, the cost of just these two memory chips could increase by $57 compared to the current base model iPhone 17. For a device priced at $799, this represents a significant hit to profit margins.
For a long time, Apple has been an unrivaled "titan" among the many iPhone component manufacturers and assemblers in Asia, thanks to its immense purchasing power and expertise in designing advanced electronics.
According to people familiar with the matter, Apple spends tens of billions of dollars annually on NAND chips, likely making it the world's largest single buyer. Suppliers have historically competed fiercely for Apple's business, hoping to leverage its technical expertise and brand prestige to attract other clients.
"Today, the companies pushing the boundaries of engineering on a human scale are firms like Nvidia," said Ming-Chi Kuo, an analyst at TF International Securities.
Demand for AI hardware is expected to continue its rapid growth. Even though Apple's iPhone 17 series sales hit record highs, its spending growth remains relatively modest compared to the investments being made to build AI data centers.
According to sources familiar with Apple's supply chain, Samsung Electronics and SK Hynix are raising prices for a specific DRAM chip supplied to Apple. Large AI companies are not only offering higher prices but are also willing to lock in long-term supply and pay deposits upfront, giving these Korean chipmakers leverage over Apple.
Apple holds long-term memory procurement contracts, but it has historically used its influence to squeeze suppliers. Sources familiar with Apple's memory purchasing said these contracts grant Apple significant bargaining power, allowing it to negotiate prices weekly and even refuse to purchase memory from a supplier if it deems the price unfavorable. To further strengthen its hand, Apple has even begun increasing its memory inventory—a rare move for Cook, who typically minimizes inventory to maximize Apple's cash flow.
Apple is not only competing for current supply orders but is also vying for the attention of supplier engineers. According to industry executives, glass scientists who once focused on developing the thinnest, smoothest smartphone displays are now shifting some effort toward specialized glass used to encase high-end AI processor chips.
Manufacturers of sensors and other components inside the iPhone are winning new orders from AI companies like OpenAI, which are developing their own hardware products.
However, suppliers say they are far from abandoning their relationship with Apple. They describe working with Apple as a learning process, noting that it remains one of the most demanding and rigorously managed clients in the industry.
TSMC has long viewed Apple as its most important customer, relying on the stable and predictable massive demand for iPhones to successfully develop generation after generation of the most advanced chips. Now, as TSMC deepens its ties with Nvidia and other AI companies, Apple is exploring whether it can have other manufacturers produce some of its mid-to-low-end processors, according to people familiar with the chip supply chain.
A significant source of profit for Apple comes from selling additional memory at prices far exceeding the cost of the memory chips themselves. Last autumn, Apple discontinued the 128GB storage version of its iPhone Pro models. Now, consumers wanting a Pro model must start at 256GB, paying an extra $100. Analyst Craig Moffett of MoffettNathanson wrote in an investor note that Apple might employ a similar tactic again this year to help offset rising costs.
However, analyst Ming-Chi Kuo stated that Apple is not expected to further increase the price of its next-generation iPhone models compared to similarly configured iPhone 17 models.
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