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Samsung and Apple, the world's top two phone manufacturers are locked in a court battle that's threatening their supplier-client relationship.  (Source: Into Mobile/AP)

Ultimately Samsung's device business -- whose revenue grew 500 percent last quarter -- is more valuable to it then its fast-growing (but not THAT fast growing) supplier business.
Analysts suggests Apple's customers may hardly notice the difference, even if they're paying more

Even as Samsung Electronics Comp., Ltd.'s (SEO 005930) legal woes [1][2][3][4][5] 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 Samsung

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."



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A classic case of
By phantom505 on 9/27/2011 10:19:41 AM , Rating: 2
cut the nose off to spite the face. Or perhaps it was a preemptive strike.

Personally I think Samsung should have dumped Apple. In fact, they have been planning on it from the looks of things.




RE: A classic case of
By retrospooty on 9/27/2011 10:23:04 AM , Rating: 5
"Personally I think Samsung should have dumped Apple. In fact, they have been planning on it from the looks of things. "

Considering how ego-driven, childish, and vain Apple can be, I agree. It's funny to me, Apple seems like a spited child... "Fine, then I'm not your friend anymore" LOL


RE: A classic case of
By Mitch101 on 9/27/2011 11:02:00 AM , Rating: 2
Apple seems to be running out of companies they can tick off. How long will the relationship with Toshiba last?


RE: A classic case of
By seamonkey79 on 9/27/2011 9:42:27 PM , Rating: 2
Do they realize that Toshiba also makes Android based tablets in the same form as Samsung does? This, even more than before, is stinking like a "I can't believe you're doing this well when you're not me!"

So they're going to leave one competitor to find another competitor that will cost them more, just so they can leave the competitor that is about to overtake them.

Smashing form, go Apple.


RE: A classic case of
By shiftypy on 9/29/2011 7:54:29 AM , Rating: 2
So Samsung loses a NAND chip client... ok
At the same time getting FREE promotion as being producer of great NAND memory
And at the same time world is announced that from now on Apple will use inferior memory in its products

Apple is awesome


RE: A classic case of
By BZDTemp on 9/27/2011 11:47:20 AM , Rating: 2
Most likely Samsung are bound by contracts just as it is likely Apple are bound to Samsung.

If so the delivery of Samsung parts will continue until the contract allows one of the companies to end it since the alternative will likely cost big money.


RE: A classic case of
By Aikouka on 9/27/2011 12:10:54 PM , Rating: 2
I don't think it makes sense for Samsung Electronic's semiconductor business area to drop Apple's business simply because Apple is having legal spats with Samsung Electronic's telecommunication network business area. In my (albeit somewhat limited) experience, business areas tend to operate fairly autonomously from each other.

So why would the semiconductor area want to drop sales and look worse off? :P


RE: A classic case of
By XZerg on 9/27/2011 12:52:34 PM , Rating: 1
exactly... Why would I hurt my own sales for some bullshit one of my prime customers is doing? In the end it is the money that matters in business world.


RE: A classic case of
By bh192012 on 9/27/2011 1:22:35 PM , Rating: 2
You do know that Apple is a competitor to their higher revenue handset business?

By forcing their #1 competitor in their most profitable sector into a bad spot, they'll make back that 5% and more. Then their semi team will be fueling Samsung's fire and not Apple's.


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