Samsung Electronics Comp., Ltd.'s (SEO 005930) legal woes  regarding Apple, Inc.'s (AAPL) campaign of
lawsuits and trade court complaints continue, it faces a perhaps more serious
crisis in the form of an eroding supply relationship with its legal rival. Samsung
currently "has its cake and eats it too", enjoying a position in that
it's the world's second largest phone manufacturer, and at the same
time drawing a great deal of revenue from the world's largest phone
manufacturer, Apple, whom it supplies NAND flash memory. But that
comfortable situation for Samsung could be coming to an end.
I. Apple Expected to Dump
Nho Geun-chang, an analyst at HMC Investment Securities tells Reuters in an interview, "Samsung's tablet business will be
most affected and its chip business will also take a hit as Apple moves to
diversify away from Samsung to the likes of Toshiba. For Samsung, (the) biggest
concern is reduced order from Apple. Without Apple's big backing, it would be
difficult for Samsung to boost its chip market share sharply."
Mr. Geun-chang suggests that while the chips from rival suppliers will
likely be slightly inferior in reliability, power performance, and other
metrics, and may increase device costs, Apple's unquestioningly loyal customer
will hardly notice the difference. He comments, "Apple is leveraging
the fact that it's got alternative suppliers. They may offer inferior or more
expensive components but it's something consumers barely notice and something
Apple can successfully use to pressure Samsung."
II. Device Business is More
Lucrative for Samsung
The battle against Apple may prove painful, given the slow death of its
lucrative supply contract, but it's one that Samsung must commit to, according
to Mr. Geun-Chang.
Samsung's supplier contracts to Apple in calendar Q1 2011 constituted 5.8
percent of its revenue, up from 4 percent ($5.7B USD) a year prior. But
its devices business is too valuable to sacrifice even for the lucrative supply
contract -- device sales will soon constitute over half of the company's
revenue, according to analysts. States Mr. Geun-chang, "[T]aking
passive steps for fear of losing its biggest customer will slow down strong
growth momentum at its telecoms business, which Samsung doesn't want to see as
the business is set to become the biggest earnings generator this year and make
up for weakening chip profits. It'll be a costly battle for Samsung."
Some say the lawsuit campaign could hurt Apple more than Samsung.
Aside from possible quality and price issues with a supplier switch,
Apple may be creating the perception that Samsung is the best of the
competition. States Choi Do-youn, an analyst at LIG Investment &
Securities, "These legal battles are raising perception among consumers
that Samsung is the only one capable of competing against Apple."
There's some truth in that belief. Samsung is by far the top
Android phone manufacturer and holds a huge lead in tablet sales over other
Android manufacturers. In the tablet sector it's the only company to be
currently giving serious chase to Apple, selling 7.5 million tablets in H1
2011, compared with Apple's 14 million.
On the smart phone side Samsung's diversified approach is paying even
greater dividends. The company's broad lineup, which includes the best-selling Galaxy family of smart phones, posted 500 percent
growth in Q2 2011, compared to an impressive, but lesser 142 percent growth by
Apple. Some expect Samsung to dethrone Apple's brief reign atop global
smart phone sales (by manufacturer) when the Q3 2011 numbers come out next month.
Samsung and Apple are now suing each other in at least 23 lawsuits or
trade complaints in 10 different countries. One key trade complaint will
be Apple's request to ban sales of Samsung's tablets and smart phones, via an
import ban, which the U.S.
International Trade Commission will consider [docket record] next month. In anticipation of that hearing,
Verizon Communications, Inc. (VZ) has filed a friend of the court brief on behalf of Samsung, saying an import ban would create economic
harm to U.S. customers and lead to job loss.
Some are holding out hope that the pair will settle their dispute outside
court, similar to Apple and Finland's Nokia Oyj. (HEL:NOK1V).
Comments HSBC analyst Daniel Kim, "The most likely scenario is
an out-of-court settlement, after a long-drawn IP battle... As in the case of
the Nokia-Apple dispute, this issue too is likely to be settled out of the
court, after a long drawn legal dispute."