A little less Samsung in Apple sourcing - Financial Times (blog)

Following Apple’s landmark US victory over Samsung last month in their high-profile technology disputes, rumours are rampant over their sourcing business relationship.

The rumours centre on Apple’s alleged diversification of its supply of microchips. Several media outlets reported on Friday that Apple dropped Samsung from its list of memory chip suppliers for the first batches of the much-anticipated iPhone 5, which is expected to be launched on Wednesday.

The Korea Economic Daily said that Samsung would not supply two types of flash memory chips for the iPhone 5 as Apple has asked South Korea’s Hynix Semiconductor and Japan’s Toshiba to supply them instead. It also reported that Apple would not use Samsung’s screens for its new smartphone and the iPad Mini, which is expected to hit the shelves in October, and instead would seek more supplies from Korea’s LG Display and Taiwan’s AU Optronics.

Last month, Apple won a key legal victory in the US, winning $1bn in damages, after a jury found that Samsung had copied some features of the iPhone. Samsung then won a similar case in Japan. But the two are still embroiled in legal battle on four continents since Apple accused Samsung of patent violations last year and Samsung claimed that Apple infringed its telecoms technology.

The deepening legal disputes are also allegedly affecting businesses of Samsung’s affiliates. According to the local business daily, Apple picked China’s Amperex Technology and Japan’s Panasonic, instead of Samsung SDI, as battery suppliers for the next iPhone. Still, Samsung will continue to supply the key application processors powering Apple’s iPhone 5 and flash memory chips for sold-state drives of Apple’s MacBook computers.

Investors are worried that Apple’s alleged move could deal a blow to Samsung, which is getting an estimated 9 per cent of its revenue from Apple, its largest single customer. Samsung declined to comment on the rumours. But its version of the story seems different, according to other media reports. Bloomberg said Samsung refused to supply flash memory chips for Apple’s iPhone 5 because of disagreements over pricing. Local reports also say Samsung did not want to supply Apple for the low prices that the US company was demanding and was instead shifting the volume for the use of its own mobile phone division amid booming sales of the Galaxy S III smartphone.

Both claims seem to be true, analysts say. “In addition to litigation risks, we believe Apple is trying to actively diversify their component supply away from Samsung,” Mark Newman, a senior analyst at Sanford Bernstein, said in a recent report.

Apple’s orders to Samsung have been trending down, analysts say, as Samsung emerges as its strongest competitor in mobile devices with the popular Galaxy line products. Samsung, the world’s largest smartphone maker, said on Thursday sales of its latest Galaxy S III smarthpones topped 20m since its late-May launch.

But Apple’s alleged shift away from Samsung would not have a big impact on Samsung’s revenues, says Kim Hyung-shik, an analyst at Taurus Investment & Securities. “For Samsung, there is no reason why it should sell chips to Apple at below-market prices when the company is busy keeping up with its own demand,” he says. “Although Apple may reduce supplies from Samsung, it will still have to rely on Samsung for some key chips such as application processors for the time being because other chipmakers simply can’t make such high-quality chips for Apple.”

Still, it would not be good news for Samsung’s investors if the company completely loses one of its key customers, especially if the next iPhone 5 proves to be as popular as its predecessors. No matter whether they want to or not, the complex interdependence between the two technology giants is likely to continue for a while. Too much is at stake for emotion to dictate their business deals.

Related reading:
Apple win sends mixed signal for suppliers, FT
Smart money backs latest iPhone launch, FT
Samsung accused of China labour breaches, FT
Samsung / Apple â€" dynamic rivalry, Lex