Apple cuts down iPhone 5 memory chip orders from Samsung

Apple Inc. has cut down its orders for memory chips for its new iPhone from major supplier and competitor Samsung Electronics Co., a source with direct knowledge of the matter told Reuters yesterday. This follows a strenuous patent infringement battle between Apple and Samsung, which resulted in the famous $1 billion verdict against Samsung.

Samsung is the sole supplier of Apple-designed chips that power the iPhone and iPad. Samsung also supplies DRAM and NAND-type memory chips and flat screens used in the popular Apple gadgets. Samsung products comprise 26 percent of the component cost of the iPhone, Samsung’s lead counsel Charles Verhoeven was quoted as saying in the media.

It may seem the relationship between the two is souring following the court case, but Reuters cites an anonymous source as saying that Apple is only looking to diversify its memory chip supply chain. The source added that the South Korean firm remains on the list of initial suppliers for the new iPhone. “Samsung is still in the list of initial memory chip suppliers (for new iPhones). But Apple orders have been trending down and Samsung is making up for the reduced order from others, notably Samsung’s handset business,” the Reuters source said.

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Apple cutting down on components business with Samsung? Maybe yes, maybe not.

Apple has been known to face supply crunches in the past following highly-anticipated releases of its popular products. Reuters reported earlier this year that Elpida was selling more than half of its mobile DRAM chips to Apple.

A South Korean publication, The Korea Economic Daily, first reported on the matter yesterday. Citing an unnamed industry source, the newspaper stated that Apple had dropped Samsung from the list of memory chip suppliers for the first batch of the new iPhone, which is widely expected to be announced on September 12. The report said Apple has opted for Japan’s Toshiba Corp, Elpida Memory and Korea’s SK Hynix to supply DRAM and NAND chips for the iPhone.

Experts and analysts said the symbiotic business relationship between Samsung and Apple is too important for either to put at risk. “Apple needs Samsung to make the iPhone and iPad. Period. Samsung is the sole supplier of Apple’s processing chips and without Samsung, they can’t make these products,” said James Song, an analyst at KDB Daewoo Securities in Seoul. “Samsung might be considering lots of options to leverage its components business’ importance and pressure Apple, and Apple could be also well aware of this.”

It may have been with the components business in mind that Samsung sought to resolve the patent dispute with Apple - which Apple first brought up shortly after Samsung launched its first Galaxy model in 2010 - through negotiation rather than in the courtroom. “We initially proposed to negotiate with Apple instead of going to court, as they had been one of our most important customers,” Samsung said in an internal memo sent to employees and released to the media late last month. “However, Apple pressed on with a lawsuit, and we have had little choice but to counter sue.”
 
While Samsung has been found to have copied innovative features of the iPhone and iPad, the Korean group’s lawyers have emphasised that its own innovative components and wireless technology patents, which the U.S. jury ruled that Apple did not violate, made Apple’s products a reality.
 
“Apple isn’t that stupid (to risk its Samsung parts deal). Apple’s agreements with Samsung will ensure that Samsung has no choice but to comply and supply,” Florian Mueller, an intellectual property consultant, posted on his blog. “Also, Samsung’s other customers would lose faith if it turned out unreliable. And since Apple threatened Samsung with litigation two years ago, it’s had plenty of time to identify alternatives.”

Samsung has around 70 percent global market share in mobile DRAMs, but Apple sources only 40 percent of its mobile DRAM chip requirement from Samsung, a boon to the likes of Elpida and SK Hynix, analysts say.

“For its part, Samsung is also diversifying its customer base to reduce its reliance to Apple - adding new ones like Qualcomm, and that’ll prove to be a good strategy longer term as Apple component margins are generally low due to its huge bargaining power,” said Daewoo’s Song. “Other suppliers may benefit from a worsening Apple/Samsung relationship in the short term, but in terms of margins, I’m doubtful they can make good money from any Apple cookie crumbs that Samsung throws away.”