Apple Might Be the Bigger Loser in the Apple-Samsung Breakup

By Sterling Wong  APR 12, 2013 9:00 AM

By turning to other chip manufacturers, Apple might have to pay more than the ultra cost-competitive Samsung.

 


It’s widely considered to be one of the biggest head-scratchers in the tech industry: Apple (NASDAQ:AAPL), despite its bitter rivalry with Samsung (PINK:SSNLF), still spends billions of dollars each year ordering components made by the South Korean conglomerate.
 
But Apple appears to have finally made the decision to break up with Samsung. According to the Korea Times, the Cupertino, California-based company is leaving Samsung out of its project to develop its next-generation A7 application processors for future iPhones, iPads, and other mobile devices.
 
Previously, Apple had already reduced Samsung’s role in supplying displays for its mobile devices, turning to the likes of LG Display (NYSE:LPL) and Sharp (PINK:SHCAY) instead.
 
An Apple A6 processor. Source: MacWorld Australia
''Apple is cutting the use of Samsung displays for its products. Now the deterioration of ties has expanded to chips. You should remember that the application business is one of Samsung’s new growth engines in which the firm is heavily investing,’’ an official at a leading parts supplier to Samsung told the Korea Times.
 
Given the fact the Apple has filed several lawsuits alleging that Samsung has ripped off some of its ideas for use in its Galaxy devices, it is unsurprising that Apple has finally decided to stop relying on Samsung as a chip supplier.
 
“Rightly or wrongly -- and one can have a debate about that -- Apple seems to believe that by using Samsung as their foundry partner, they are somehow being disadvantaged with Samsung having better visibility of its roadmap, what features it’s going to implement, etc.,” Dr. Richard Windsor, founder of the mobile-focused blog Radio Free Mobile and a former tech analyst at Nomura, tells Minyanville. He also notes that he believes Samsung does not actually take advantage of any knowledge it gains from the Apple relationship.
 
“In order for Samsung’s semiconductor division to make Apple’s chips, it’s got to have access to Apple’s roadmap, but I believe that info is not shared with the handset business. My conclusions from looking at Samsung is that there is an effective Chinese wall in the operations of its different divisions,” says Windsor.

(See also: Samsung's Galaxy S4 Will Be the World's Fastest Smartphone, but Does That Really Matter?)
 
“Samsung has been a major memory chip supplier to mobile phone companies for many, many years. If any of these guys even got a hint that they were unfairly treated by Samsung in the same regard that people are worrying about with Apple, I think those customers would’ve disappeared a long time ago,” Windsor continues.
 
“Memory is a commodity they can buy elsewhere. There are plenty of other options like SK Hynix (KRX:000660) and Toshiba (PINK:TOSBF). The fact that they go back to Samsung, of course, is because Samsung is a big gorilla in memory and can sell it cheaper than anyone else. But at the same time, they can take comfort in knowing that Samsung is operating as a proper company.” Whether or not Samsung has copied Apple's ideas or technology, Apple appears to have made up its mind and is turning toward Taiwan Semiconductor Manufacturing Company (TSMC) (NYSE:TSM) to develop its processors.
 
Windsor, however, says that Apple might be hurt in its pivot away from Samsung because TSMC parts are more expensive.
 
“It’s worth bearing in mind that Samsung has accepted lower margins [for its chips] than TSMC has to date. And this makes it a little more difficult for Apple to go to TSMC, because if TSMC gives Apple a special deal in terms of price, then everyone else is going to want it,” says Windsor, adding that TSMC might thus end up having to cut its prices for all its clients, which is not likely a situation it desires.
 
And if Apple is unable to use its bargaining power to lower prices, then it will have to accept a higher cost of goods sold as a result of going to TSMC.

(See also: Apple's Stock Price Is Still Dropping (So Why Are You Still Interested?)
 
“TSMC might have to cut its price a bit, but it’s still not going to be as cheap as Samsung, But it would all depend on how negotiations work out,” opines Windsor.
 
As for Samsung, Windsor believes that the company will not be greatly affected if it loses Apple as a client since it can fill the gap Apple leaves with burgeoning in-house demand. For example, Samsung’s semiconductor division manufactures its Exynos-branded processors, which will power future Galaxy devices. Samsung’s Galaxy smartphone has grown dramatically in recent years to become the leading challenger to the iPhone in the global smartphone market
 
Windsor also points out that Samsung could also grow external demand for its chips, given the problems TSMC has had with its 28-nanometer chip-production process, which has caused Qualcomm (NASDAQ:QCOM) to explicitly state that it wants to look for an alternative chipmaker.
 
“Because of TSMC’s problems, many other semiconductor companies that have been fairly reliant on TSMC to date have been looking to perhaps find a second source for their foundry partner just to spread the risk a bit,” shares Windsor, highlighting that NVIDIA (NASDAQ:NVDA) is another company that could potentially be looking to diversify away from TSMC, which would be when Samsung steps in.

(See also: A Budget iPhone Is a Bad Idea.)

However, the aforementioned official at a leading parts supplier to Samsung told the Korea Times that Samsung does not want to lose Apple’s business.

''If Samsung fails to win Apple orders for A7 chips, then some of Samsung’s system chip-manufacturing lines will be stopped. That’s a scenario Samsung really doesn’t want to see.’’

To Windsor, Apple does not have a good business or strategic reason to completely cut itself off from Samsung, given his “view that Samsung does operate professionally with Apple.”

“I would say that people go to Samsung because it has high-quality manufacturing and because it offers very good pricing given their scale. Thus, if Apple sources their material somewhere else, they’d have to suffer higher cost of goods sold as a result of it,” asserts Windsor.

“Samsung would suffer somewhat from a lack of scale. But because they’ve been growing a lot recently, if they can fill in the loss of Apple with other companies looking to outsource, or in-house business, then they’d be less affected.”

(See also: My Apple iMac Is Starting to Look Like a Toaster and Was It Necessary for Apple to Kowtow to China?)

Twitter: @sterlingwong
No positions in stocks mentioned.

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