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Samsung currently manufacturers LCD screens for the iPhone (right) and CPUs for the iPad 2. Apple hopes to phase out Samsung as a chip supplier, transitioning production to TMSC.  (Source: Sizzle Core)

Analysts say Apple may have difficulty dropping Samsung, though.  (Source: Samsung)
Rivalry between tech giants grows

As predicted, Apple, Inc. (AAPL) is looking to distance itself from one of its top suppliers -- Samsung Electronics Comp., Ltd. (SEO:005930).  

Samsung is one of three top Android smartphone makers.  Getting outsold two-to-one by Android, Apple has sued all three of the top Android smartphone makers including Samsung.  Apple claims that Samsung and other Android makers both ripped off its technology and its patented thin-black rectangular design.  Samsung responded with countersuits.  

The growing legal war has created a bitter divide between the firms and put Samsung's status as one of Apple's top chips suppliers in jeopardy.  Apple is the largest single buyer of Samsung liquid crystal displays.  It also relies on Samsung for DRAM chips (iPad) and CPUs (iPad/iPhone).

According to a Reuters report, the Taiwan Semiconductor Manufacturing Company (TPE:2330) has begun trial production of the A5 CPU found in the iPad 2, in a move that clearly signals Apple's desire to drop Samsung.

However, according to the report, Apple may find doing so difficult.  Samsung helped design the A5, reportedly, and holds key patents on some of its technology.  Also, TMSC may have difficulty replicating the design without defects.  Lastly, despite the companies' awkward relationship, Samsung is actually trying to convince Apple to keep it as a supplier.

Fubon Securities analyst William Wang is quoted as saying, "Apple is trying to diversify its orders but it will still maintain some kind of relationship with Samsung. I think TSMC will get the new chip orders, the issue however is allocation. Apple won't give the whole 100 percent to TSMC. Maybe it'll allocate only 20-30 percent." 

TMSC is an attractive replacement, though.  The company is the world's top contract chipmaker.  It also has extensive experience working with British architecture firm ARM Holdings Plc. (LON:ARM), which makes the underlying architecture for virtually all smart phones and tablets on the market.  TMSC has also just completed a $7.8B USD expansion of its production facilities, including developing new process technologies.

Apple reportedly hopes to go exclusively with TMSC for its next generation CPU.  While the last two generations were named the A4 and A5, respectively, Reuters reports that the next gen CPU will bear a different a non "Ax" branding.

Seo Won-seok, an analyst at NH Investment and Securities in Seoul, South Korea is doubtful that TMSC will earn the majority of the chip production contract, though.  He states, "It won't be easy for Apple to dramatically change its chip provider from Samsung. It has to redesign the chipset, which Samsung has been deeply involved from the beginning and has some intellectual property. Apple could try various suppliers but they (Samsung and Apple) need each other and the relationship will continue."

Nobody knows for sure what will happen, but the unfolding drama is fascinating to watch.  Even as Apple and Samsung directly vie for the top spot in global phone sales, the pair will continue their tug and pull behind the scenes with regards to their customer-supplier relationship.  Apple may try to ditch Samsung, but the Asian chipmaker will seek to make America's largest single phone maker an offer too compelling to refuse.

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RE: I'd Like
By Tony Swash on 7/15/2011 2:39:04 PM , Rating: 2
that would be a very bad deal for apple and samsung.

i would laugh regardless because i hate apple. it would probably be worse for apple, not being able to produce their iPhone quickly enough / at all until apple found a new supplier.

i thought samsung made some of the ipad2 screens as well? and LG make some?

Samsung is more vulnerable as it is in a worse state financially and isn't sitting on a 100 billion in cash. Samsung Electronics' reported its lowest quarterly profit in almost two years in April 2011 as demand for its products continued to fall.

Net profit for the first three months of the year stood a 2.78 trillion won ($2.6bn; £1.6bn) a 30% drop compared with the same period last year. The electronics maker has been hit hard by weak demand and falling prices of TVs and LCD panels. Losing a customer as big as Apple would not be good.

RE: I'd Like
By troysavary on 7/15/2011 5:12:00 PM , Rating: 2
Yeah, Samsung is sure in trouble from falling LCD prices. Maybe they should diversify into other areas, like washers, dryers, fridges, stoves, hell, why stop at appliances, why not go into banking, health care, education, retail? Oh, wait, they already do all of this, and more. My bad.

Seriously, sales to Apple are such a small part of Samsung's overall business. They are WAY more than just TVs and phones. Samsung would weather an Apple-Samsung divorce way better than Apple would.

RE: I'd Like
By ltcommanderdata on 7/15/2011 7:03:37 PM , Rating: 4

Apple is reportedly Samsung's biggest customer with a $7.8 billion deal signed earlier this year. If Apple completely cuts all ties to Samsung it'll be like weathering a hurricane rather than a simple storm.

Apple has also been paying for the construction of Samsung's LCD factories as far back as 1999. It'll be interesting to see what type of deal exists and whether if Apple leaves they take those Apple funded, Samsung run factories with them.

Apple has been is rumoured to have also funded LCD factory construction for LG, Sharp and Toshiba so Apple is well diversified in guaranteed LCD production from multiple sources through factories Apple themself are helping to build.

RE: I'd Like
By BZDTemp on 7/16/2011 6:24:53 PM , Rating: 2
Apple is reportedly Samsung's biggest customer with a $7.8 billion deal...

$7.8 billion is a big amount of cash, but let's not forget Samsung has lots of customers and while none may shell out that much big number are not unheard of. For instance some 3 months ago Maersk ordered two drillships from Samsung for $1.3 billion.

RE: I'd Like
By troysavary on 7/17/2011 7:13:18 PM , Rating: 2
Samsung Electronics 2010 revenues were $133.78 billion. That is not including all Samsung's other subsideries. Samsung could afford to lose Apple, even if they couldn't find new buyers, which is an absurd idea, considering the fact there is a shortage of the very componants Apple gets from Samsung. Apple needs Samsung, Samsung does not need Apple.

Apple invested $100 million in Samsung's LCD business, according to that link. That would make them a very small partner, not, as you put is, the builder of the business. Samsung's LCD business is worth many billions of dollars. $100 million is a drop in the bucket.

Added to this, Apple's other large supplier of panels is LG, who also happens to make Android phones as well. Is Apple going to sue them also? LG would also benefit from Apple having supply problems for their iDevices.

RE: I'd Like
By tng on 7/18/2011 9:24:45 AM , Rating: 2
Oh, wait, they already do all of this, and more.
You missed that at one point, when Hyundai introduced their new cars in Korea, Samsung bought a whole factory from Mitsubishi to compete with Hyundai (their biggest rival). If I remember the story correctly, the government stepped in to stop the nonsense.

"I mean, if you wanna break down someone's door, why don't you start with AT&T, for God sakes? They make your amazing phone unusable as a phone!" -- Jon Stewart on Apple and the iPhone

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