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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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RE: Clutching at straws
By Tony Swash on 9/27/2011 1:29:43 PM , Rating: 2
How do you know this? If you make a statement, you've got to back it up with proof. If you're right, it'd be nice to see this verified.

The web is littered with such evidence. All of 30 seconds in Google found this:

7 June 2010

A report by AMR Research has named Apple as the company with best supply chain practices in the world for the third year running.

AMR praised Apple’s “embedded innovation, networked supply and demand shaping”. It also highlighted the company’s effective use of vertical integration as a strategy, in particular the purchase of chipmaker Intrinsity “acquired by Apple to ‘steal a march’ on competitors looking to enhance the performance of mobile devices”.

In a feature exploring the secret behind Apple’s success, SM found the company’s ability to bring together two sides of the supply chain (digital and physical) efficiently and at increasingly low cost is a central plank to its rise to global dominance.
Kevin O’Marah and Debra Hofman, the authors of the AMR report, noted that responsibility for the supply chain is moving to board level. “Twenty years ago, a typical product company had the supply chain reporting to manufacturing, with responsibility mainly for inbound materials management and outbound shipping.

“New data shows that supply chain reports to manufacturing in only 6 per cent of companies surveyed, while 61 per cent have the head of supply chain reporting directly to the CEO, general manager or president of the business. It seems clear that supply chain has grown up and the business has taken notice.”

The report also noted that there is growing evidence of a link between effective supply chain activities and good financial results.

and this

and this

3 June 2011 | Adam Leach

Apple’s supply chain has been rated the best in the world for the fourth consecutive year.
According to the annual supply chain ranking compiled by research company Gartner (following their acquisition of previous ranking publisher AMR Research), the California-based technology firm scored consistently strongly in each category, but particularly highly in the ‘peer opinion’ category – which fellow supply chain professionals are asked for their views – and ‘Gartner opinion’ category – which takes into account the view of Gartner researchers. The rank is based on a range of factors, including financial performance, inventory and revenue growth, in addition to opinions.

Like I said clutching at straws and then denying they snapped off in your hand. A lot of you sound desperate to me :)

RE: Clutching at straws
By wiz220 on 9/27/2011 2:42:39 PM , Rating: 5

"demand shaping”

What a great marketing term for, "manipulating the idiot masses".

RE: Clutching at straws
By The Insolent One on 9/27/2011 3:53:15 PM , Rating: 2
"Idiot masses"
Of which you and I are part of.

The first and most crucial part to being manipulated is thinking that only "the idiot masses" are.

RE: Clutching at straws
By Pirks on 9/27/2011 4:39:40 PM , Rating: 2
Why do you think the people who are not experts in computers are necessarily idiots?

Maybe they are great English literature or automotive engine experts for instance, and they too think that whoever is not an English literature or an automotive engine expert must be an idiot :)

So, have you ever thought that those people may also consider YOU an idiot, huh?

RE: Clutching at straws
By Tony Swash on 9/27/11, Rating: 0
RE: Clutching at straws
By Reclaimer77 on 9/27/2011 7:02:24 PM , Rating: 3
Thinking like that, dismissing millions of people as idiots, is a defence mechanism.

Millions of people listen to country music. Millions of people don't bathe every day. Millions of people thought Rebecca Black's "Friday" was a good song. Millions of people get fat and die. Millions of people will buy something just because it's shiny and new.

We could go on and on, you see my point. It's not a defense mechanism, it's a value judgment. In this case, a valid one.

RE: Clutching at straws
By snakeInTheGrass on 9/27/2011 8:25:02 PM , Rating: 1
Millions of people get fat and die.

Hahaha - news flash! Everyone dies. Not a value judgement.

RE: Clutching at straws
By Tony Swash on 9/27/11, Rating: 0
RE: Clutching at straws
By Reclaimer77 on 9/27/2011 9:02:34 PM , Rating: 2
Coming from YOU that means next to nothing lol.

"I modded down, down, down, and the flames went higher." -- Sven Olsen

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