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Apple and Samsung Breakup Seems Increasingly Likely

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Apple continues legal battles with Samsung.

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MINYANVILLE ORIGINAL A report on Monday from the Korea Times (via CNET) caused confusion when it stated that Samsung
(PINK:SSNLF) will end its LCD panel supply agreement with Apple (NASDAQ:AAPL) in 2013. The report claimed that Samsung no longer viewed Apple as a cash generator because of Apple's "stiffer supply-chain management structure." Orders from Samsung Electronics handset division and Amazon (NASDAQ:AMZN) were mentioned as substitutes for Apple's business.

Samsung, however, later released an official statement denying the report, telling CNET that "the Korea Times report was 100% false." A Samsung Display spokesman said, "Samsung Display has never tried to cut the supply for LCD panels to Apple."

It's no secret, though, that Apple has been reducing its reliance on Samsung for components of its devices. Just this year, display panel orders for Samsung Display have declined from 15 million panels in the first quarter to 3 million in the third quarter, according to AllThingsD. Estimates say Apple will only purchase 1.5 million display panels from Samsung in the fourth quarter of this year.

Despite the official statements from Samsung, it appears Apple continues to cut Samsung out of the picture. Today AppleInsider wrote, citing a Digitimes report, LG Display (NYSE:LPL) received most of Apple's new display screen orders for most of its new products, including the iPad Mini, fourth-generation iPad, 13-inch MacBook Pro, and 21.5-inch and 27-inch iMac models. LG Display supplies the panels to Foxconn (HKG:2038), which assembles Apple's products. Digitimes cited industry sources.

The transition to new suppliers will cost Apple in the short term. LG has struggled to produce Retina displays, with reports of screen burn-in surfacing.

Digitimes also reported that AU Optronics (NYSE:AUO) will produce panels for the iPad Mini. LG had already been in the supply chain, but the addition of AU Optronics is recent. Adding AU Optronics into the supply chain may, in the short term, cost Apple in iPad Mini sales. Even before the official unveiling of the iPad Mini, reports surfaced about AU Optronics struggle to produce enough of the displays for the tablet.

AU Optronics and LG have seen low yields rates for the GF2, or DITO film, touchscreen technology has caused the iPad Mini to cost more. Sources said the GF2 screens make the tablet 40%-50% more expensive than other 7-inch tablets, which use OGS or G/G structures for their screens. The GF2 screen is only $5 cheaper than the G/G screens used in the 9.7-inch iPad models.

Apple also enlists Sharp (TYO:6753) and Chimei Innolux Corporation (TPE:3481) as display panels producers.

The business ties involving the other components Samsung produces for Apple have been fraying, too.

In September, the Wall Street Journal reported Apple had begun introducing new Asian memory chip makers for the iPhone into its supply chain, reducing business with Samsung. The article highlighted the South Korea-based SK Hynix (KRX:000660) as the recipient of more orders for both DRAM and NAND flash memory chips. Samsung would still be supplying the new A6 processor chip used in the iPhone 5.

However, earlier this month, other reports surfaced revealing that Apple would place new orders for future processor chips with other manufacturers. According to CNET, Samsung was the sole supplier of previous processor chips, but now Apple does not work with Samsung to design the processor chips as it did in the past. A Samsung official said of the A6 chip, "Apple did all the design and we are just producing the chips on a foundry basis."

Apple will begin working with Taiwan Semiconductor Manufacturing Company (TPE:2330) to produce a future A7 chip. The transition will likely cause similar supply problems seen with AU Optronics as "moving Apple chip production from Samsung to another foundry would be a monumental undertaking."

Memory chips, processors, and display panels constitute the bulk of components Samsung manufactures for Apple.

While the two major tech companies continue to do business, the protracted legal battles between them indicate their business relationship will likely continue to deteriorate.

Apple Wins Another Court Case in the US

On the same day a Dutch court handed Apple a defeat against Samsung in a patent case, Apple won a preliminary case in the United States.

Apple has lost recent cases in Europe in the UK and Germany, and the Dutch court ruled similarly to the other courts. The Dutch court did not find that Samsung infringed on Apple's patents for the "pinch and zoom" function.

In the US, the International Trade Commission, or ITC, issued a preliminary ruling stating that Samsung had violated four of the seven Apple patents listed in the case. The full committee of the ITC will make a final decision by February 25 of next year.

Twitter: @ChrisWitrak
No positions in stocks mentioned.
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