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Business News/ Companies / Apple-Samsung alliance should terrify competitors
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Apple-Samsung alliance should terrify competitors

While Apple and Samsung stand to gain from their newfound friendship, just about all other companies in the industry will suffer

In August 2014, Apple CEO Tim Cook agreed to begin winding down the patent suits with Samsung, and the two companies are teaming up again on new products. Photo: Bloomberg Premium
In August 2014, Apple CEO Tim Cook agreed to begin winding down the patent suits with Samsung, and the two companies are teaming up again on new products. Photo: Bloomberg

The technology industry’s greatest rivalry may be turning into an unstoppable collaboration.

Relations between Apple Inc. and Samsung Electronics Co. Ltd appear to be thawing since the war waged by Steve Jobs forced these one-time corporate comrades to end lucrative supply contracts and engage in costly legal battles.

In August 2014, Apple chief executive officer Tim Cook agreed to begin winding down the patent suits with Samsung, and the two companies are teaming up again on new products.

Samsung will manufacture the main chip for the next iPhone, as well as displays for other Apple products, and it is budgeting $14 billion for new plants and equipment that are expected to accommodate, among other things, its big new client.

From this alliance, Apple gets access to one of the biggest, most sophisticated chip manufacturing operations in the world to help it continue outselling the competition.

Samsung gets crucial new orders for its core chip making group to make up for stagnating profit in mobile phones. Just about all other companies in the industry will suffer, starting with Taiwan Semiconductor Manufacturing Co. Ltd (TSMC) and SanDisk Corp.

On 29 April, Samsung reported first-quarter earnings showing growth in every one of its component businesses.

Meanwhile, TSMC, which made the main chip for previous versions of the iPhone, cut its spending plans.

“Samsung has come back with a vengeance into the chip market," says Betsy Van Hees, an analyst at Wedbush Securities. “When you look at all the capacity they’re going to put online, it’s an amazing amount of money that they’re investing."

Another likely loser from an Apple-Samsung love affair is SanDisk. The company, which makes memory chips for the iPhone, iPad, and Mac, released a forecast on 15 April that fell short of analyst estimates.

SanDisk cited lower prices, product delays, and the loss of customers. Apple is believed to be one of those customers, having turned to Samsung for the flash drives used in many newer Mac models, according to analysts. “Playing against Samsung is never easy," says Daniel Amir, an analyst at Ladenburg Thalmann. “They took away SanDisk’s business at Apple."

Apple was SanDisk’s biggest customer by far, contributing 19% of the chip maker’s revenue, according to data compiled by Bloomberg.

SanDisk’s dependence on Apple and the ensuing fallout could make it a canary in the manufacturing plant for companies in the industry that have similar relationships with the tech giant from Cupertino, California Micron Technology Inc., SK Hynix Inc., AU Optronics Corp., and TSMC all count Apple among their top three clients, and each competes directly with Samsung in their respective markets.

Even as it’s expected to manufacture chips for Apple, Samsung continues to make smartphones of its own. The Galaxy S6 and S6 Edge, released on 10 April, are receiving favourable reviews. But the company has every reason to refocus on its roots as a chip maker.

As recently as June 2014, Samsung’s mobile phone division was providing more than 60% of the company’s operating profit. That slipped to 37% by the end of last year, with the semiconductor division picking up the slack to account for more than half.

Samsung and Apple account for 17% of worldwide chip purchases, according to research firm Gartner. And they make up 40% of the smartphone market by units, according to researcher IDC. In other words, you can’t avoid them. As if the prospect of losing Apple’s business weren’t enough, chip makers have to worry about Samsung building more of the components for its own devices in-house.

The latest Galaxy phones use Samsung-made processors, storage chips, modems, and image processors, whereas previous models farmed out some of the work to other companies.

Samsung had long promised not to favour its own components if it could get a better deal elsewhere. That no longer seems to be the case. After Apple, SanDisk’s biggest customer is Samsung, according to data compiled by Bloomberg.

Qualcomm Inc., the world’s largest designer of phone chips and maker of the iPhone’s cellular modem, counts Samsung and Apple among its biggest customers. Samsung ditched Qualcomm components for its Galaxy S6 and S6 Edge, and the chip maker says Samsung will also forgo its processors in the next Galaxy Note phones.

Qualcomm chairman Paul Jacobs may have a strategy to reclaim lost business. The company failed to win the Galaxy orders partly because its chips were made using a slightly older manufacturing process at TSMC factories, which limited improvements to performance and battery life.

When asked on 28 April what it could do to lure Samsung back, Jacobs suggested Qualcomm might be moving its production to the Korean company’s superior factories.

Although Samsung’s newest phones don’t use Qualcomm chips, perhaps Jacobs and his colleagues should root for the products to succeed.

If Samsung again proves a threat to Apple in smartphones, Cook may be less keen to look past the rivalry. Bloomberg

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Published: 04 May 2015, 12:19 AM IST
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