What’s really happening between Samsung and Apple?

November 19, 2012
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    There’s no commercial relationship in the tech industry that is more bizarre than that between Apple and Samsung. The two tech giants are bitter rivals in the market and the courtrooms, but that doesn’t stop them from enjoying a mutually lucrative relationship, where Samsung provides essential components of the iPhone and the iPad.

    If you’ve been following us over the past few months, you probably know that the fragile partnership between Samsung and Apple is slowly disintegrating. Apple seems bent to wean itself of Samsung’s services, while the Koreans appear to be torn between the huge profits generated by Apple’s business and the urge to deal a heavy blow to a powerful rival.

    In this context, a number of conflicting reports have popped up. A rumor appeared that Samsung will no longer supply displays to Apple starting next year. The rumor was quickly denied. Last week, another report talked about Samsung hiking the prices of the processors it makes for Apple, and again, the rumor was refuted soon after. Meanwhile, Apple is reportedly looking for alternate suppliers of displays, processors, and memory modules.

    So, what’s really happening between the two partners? Will they file for divorce? Will they continue their open relationship? Or are they just slowly drifting apart?

    Apple refused to renew contracts for processors beyond 2013

    A full break up between the two companies is not feasible at this point. It’s very unlikely that Apple will ditch Samsung in the next months, simply because Tim Cook would find it very hard (or even impossible) to find a replacement for Samsung. Plus, there are commercial obligations between the two partners that can’t be abandoned without major expenses.

    Still, a complete break up is probable in the future. Analyst Mark Newman from Bernstein Research wrote that Apple has refused to extend long-term agreements with Samsung beyond the end of 2013. This refusal corroborates with earlier reports about discussions between Apple and TSMC regarding processor manufacturing on the 20nm process.

    According to a Citigroup research report, TSMC will be the sole supplier of 20nm-based quad-core processors for Apple’s upcoming products. The Cupertino-based company is thus ramping down orders from Samsung, while giving more business to TSMC. The Taiwan-based foundry has already revealed that its 20nm process deployment is ahead of schedule, and the first units will roll off the production lines in early 2014.

    In this situation, Samsung is understandably unwilling to continue offering discounts to Apple or to invest in production capacity that is likely to go unused if Apple moves its business to TSMC. The same thing is happening with NAND storage modules, says Bernstein’s Mark Newman. And we can add displays to the list – Samsung is producing an increasingly smaller part of the millions of displays that go into Apple’s devices.

    It’s nothing personal

    Make no mistake. It’s strictly business, despite what some would have you believe.

    Samsung is not looking to stick it to Apple for the billion dollar worth of punishment it received this summer. The Koreans are simply aware that Apple is planning to move their business to its competitors; the writing is on the wall, so why not toughen up and get some extra cash while the customer is still captive?

    The idea that Samsung is seeking revenge or compensation for the distress that Apple’s legal team has caused it is great for inflammatory posts, but in real life, neither part can afford the luxury to make decisions based on sentiments.

    What’s the impact on Samsung?

    Samsung is doing pretty well for itself. The electronics makers is boasting record profits quarter after quarter, buoyed by the booming mobile business, but also by the billions of dollars worth of business that comes from Apple.

    Even with its biggest client gone, Samsung will likely have no problem using up its vast production capacity to make components for its own popular devices, from smartphones and tablets, to Chromebooks and Smart TVs.

    Apple is already out with all guns blazing when it comes to patents, so the fact that it will no longer depend on Samsung to make its iDevices will mean little in the ongoing legal wars.

    We tech bloggers might lose one of the juiciest topics around, comments sections might be consumed by fewer flame wars, but the tech industry will just keep evolving at breakneck speed.

    Comments

    • rikomenzies

      Great post. Certainly something I wish people would just realize is that, as petty as people are, business is just that–business. There are no angry, weeping phone calls at night or calling each other names across the street and chucking Molotov cocktails into each other’s windows. No death threats, that’s for sure.

      Not that this will encourage anyone to grow up a little.

      • masterdebater

        How about the thing about going ‘thermonuclear’? Business?

        • Doan

          Well.. yes. If he truly thought that Android was a stolen product, then it’s completely about business. You can’t let companies go around stealing your products.

          • MasterMuffin

            He really didn’t think that Android was totally stolen, but it was a great rival to Apple so LETS KILL ALL COMPETITION!

        • rikomenzies

          Very much so. Yes, it did involve some Steve Jobs making some very hyperbolic claims but Apple taking things to the courthouse is them feeling the need to “protect” their IPs and patents through legislation. It didn’t happen because Steve Jobs just happened to be angry about it.

          Not to accuse Google of stealing because we know they didn’t, but heaven forbid if Android really did ape from Apple we know it’s not because they wanted to get under Steve’s nerves on a personal basis. It’s because they’d want a successful platform that could compete.

          • hohopig

            However, Steve Job is one of those egoistic personality who probably did take it personally

            • rikomenzies

              Oh, I believe it.

        • APai

          cook is now pragmatic. jobs is gone, and the whole thermonuclear thing seems silly, especially, since they are no longer the darlings by default. acting petty was fine when there were magicians running the company with force fields. a healthy dose of reality does good to anyone!

    • john j Brennan

      The apple and Samsung debate has been going on to long, both companies have had record breaking years, both will still amaze us with their designs and technology, but when it comes to tech my heart lys with Samsung, I have seenigmatic both the iPhone and the s3 working and in my opinion the s3 wins hands down.
      People will still buy apples phones, in their opinion it is a great phone, everyone has an opinion, but seriously if u gave both phones a try, then u would have to agree that Samsung would win out, but both companies will continue to survive.

    • wangkon936

      Bogdan,

      Didn’t you read the report that TSMC rejected a $1 billion in start-up costs (cap ex in the chip making industry is notoriously expensive) from Apple and an agreement to be a sole supplier?

      http://www.eetimes.com/electronics-news/4394937/Report-TSMC-rebuffs-Apple-Qualcomm

      Chairman of TSMC was quoted as saying that he didn’t want his company so tied to just one customer (i.e. Apple and Qualcomm).

      Also, TSMC keeps failing trial runs of Apple chips. Don’t know how they are going to fix this in a year. If TSMC is gonna be the sole manufacturer in a year for Apple, I would expect a lot more supply delays, which would ultimately give Android manufacturers like Samsung just more opportunity to gobble up market share. Apple abandons Samsung (a proven manufacturer able to make hundreds of millions of logic chips cheaply, efficiently and reliably) at its own peril.

      • cycad007

        Wangkon,

        TSMC currently is more advanced than Samsung (estimated 1 year ahead of Samsung in terms of technology & manufacturing processes) in terms of chip manufacturing. Yes…their troubles with the 28 nm proccess has been well-documented. But they have finally solved their yield problems and are now better able to produce 28 nm chips on demand. Samsung, on the other hand, has yet to manufacture a 28 nm chip. Do you think they will have no yield problems?!

        The Galaxy S3 uses the 32 nm proccess….not the more advanced 28 nm proccess. In addition, companies (like Apple, Nvidia, Qualcomm, etc..) prefer investing/building new technologies with TSMC than Samsung. The reason? TSMC isn’t their direct competitor. This means that the chances of Samsung catching up to TSMC in process/manufacturing technology are slim.

        Furthermore, TMSC has already succeeded at producing tape-out 20 nm chips for Apple. Not exactly a failure…and again, certainly *AHEAD* of Samsung. The reason why Apple has been so slow to transition to TSMC is so they want to be certain that TSMC can meet their [Apple's] customer’s demands.

      • Windroipple

        Not to forget the secrecy Samsung maintains.

        Look at this year , how easily iPhone 5 got leaked , Samsung is a great partner and also a great rival.

    • Dave Weinstein

      I think you’ve got it wrong. None of us are privy to the penalties for canceling any of the supply contracts between Samsung and Apple, so it’s hard to say for sure what the costs will be.

      But… it doesn’t take a genius to see that ALL the supply lines run one direction. Regardless of the cost, the BEST strategic play would be to immediately cancel ALL supply contracts for Apple. It would completely cripple Apple for at least a year, and even with their marketing prowess, they would have a horrible time maintaining their momentum with all their products on 6+ month (or more) backorder. Apple is already phasing out Samsung, why should Samsung voluntarily give them a “soft landing”?

      There would be a short term cost for Samsung, but it would be made up 10x over just because they would have product to fulfill orders and Apple wouldn’t.

      THAT WOULD BE THE DISPATIONATE PLAY THAT MAKES SENSE! IT’S NOT ABOUT REVENGE.

      The ONLY reason I can see NOT to do this would be because of potential negative effects on PR (they probably have already run focus groups asking about this…) and potential legal implications in their ongoing legal battles with Apple.

      So I say to you. “Make no mistake, it’s strictly business, despite what you would have us believe”. The non-emotional business play here would be to put a stake through the heart of Apple while Samsung still has the chance to do some damage. The emotional play is to let them slip away.

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