SEOUL May 17 Overtaking Apple Inc as
the world's leading maker of smartphones has stretched Samsung
Electronics Co's in-house supply lines, and the
South Korean firm is now courting some of its rival's main parts
After costly courtroom battles over technology patents, the
two gadget giants are now going head-to-head over securing the
best supply of parts as they jostle to rule the $253 billion
smartphone market. The two took 100 percent of the industry's
profit in January-March, Canaccord Genuity data show.
Trampling on Apple's supply patch could make life tough for
the U.S. firm as it prepares for its next product line-up
including a cheaper iPhone for emerging markets such as China.
Having Samsung muscle in on its suppliers could drive up costs
and lead to component bottlenecks, disrupting product launches.
Samsung's huge in-house supply chain - providing parts from
displays and powerful processors to memory chips and batteries -
has been a core strength in its war for smartphone supremacy. As
it now looks to widen its lead with products spanning both the
high and cheap-and-cheerful ends of the market, Samsung's
supplies have become stretched, prompting it to hunt elsewhere
to ensure it isn't caught short.
"The next round of the post-patent battle for them will be
over component supplies," said Lee Sun-tae, an analyst at NH
Investment & Securities. "Who wins access to the best performing
components in class in large quantity - that's the key ... and
explains why Samsung is shopping for components more than ever."
SHARP AND SOUR?
Samsung has made overtures to traditional Apple partners
such as Japanese display maker Sharp Corp and South
Korean chipmaker SK Hynix. Samsung, which buys most
of its mobile screens from its Samsung Display unit, last year
placed orders with Sharp for high-resolution LCD screens for its
popular Galaxy range of products, though it later cancelled the
order, said two people familiar with the matter, asking not to
be named as the negotiations were confidential.
Sharp, in which Samsung bought a 3 percent stake earlier
this year for $110 million, said this week it
was seeking to boost sales to the Korean firm, potentially
souring the Japanese company's ties with Cupertino,
Samsung is also using more chips made by Qualcomm,
another major Apple supplier, in its flagship Galaxy S, which
went on sale late last month.
Some other suppliers who provide parts to both Apple and
Samsung include Toshiba Corp in NAND memory chips, Sony
Corp, in image sensors, and Corning Inc for its
Gorilla Glass used in iPhones, iPads and Galaxy products,
industry data show.
STMicroelectronics and Bosch, the only
mass producers of pressure sensors used in navigation features,
supply those parts for the Galaxy range, and could be tapped by
Apple for future products, according to research firm iSuppli.
TINY OVERLAP, BIG IMPACT
For sure, Samsung still buys the majority of its components
in-house, and the overlap with Apple on external suppliers is,
so far, limited. BNP Paribas estimates that more than 80 percent
of component profits generated by Galaxy S4 sales go to Samsung
itself and its units.
But even a tiny overlap can be damaging as smartphones are
constantly upgraded to more powerful computing and media devices
- allowing users to take pictures, shoot video, play music, game
online, watch TV and navigate - raising the need for more and
"Any disruption in even small parts that you wouldn't think
are really core, say headphones, can affect product launches,"
said Lee at NH Investment & Securities.
For example, Taiwan's HTC Corp, which has slipped
out of the top-10 smartphone makers, reported a record-low
quarterly profit last month after delaying the full launch of
its flagship model due to a shortage of cameras.
"Having a single supplier carries a lot of risk. Bearing
that in mind, Samsung may even consider using LCD along with
OLED in its signature Galaxy S range to reduce its total
reliance on Samsung Display," said Song Jong-ho, an analyst at
KDB Daewoo Securities.
Samsung Display doesn't produce LCDs for smartphones so as
it boosts sales at the lower end of market it needs to outsource
LCDs. The Korean firm uses the more expensive OLED display only
on its high-end models.
NOT SO DIFFERENT
Outsourcing more components could mean Samsung will lose
some of its hardware differentiation - a big selling point for
the Galaxy range - and be seen as just selling generic phones,
say some analysts.
The Exynos 5 Octa processor, which Samsung touted as having
8 brains designed to maximize energy efficiency while
multi-tasking, is not used in the S4 models sold in the United
States. Instead, Qualcomm's Snapdragon chips will power the
phone in that crucial market, with Exynos chips used in select
markets such as South Korea and some European countries.
"Given that Qualcomm chips are also found in rival products,
and the much-heralded launch of smartphones with flexible
display appears to be delayed, I'm worried Samsung is losing its
hardware differentiator," said BNP Paribas analyst Peter Yu.
Samsung says both Qualcomm and its own chips have passed its
rigorous quality standards and both will provide satisfactory
user experience. "We'll continue to resort to multi vendors to
ensure smooth supply," Kim Hyunjoon, vice president of Samsung's
mobile business, told analysts on a recent earnings call.
Samsung's Exynos processors accounted for around 30 percent
of the S3, but that is likely to fall to around 10 percent in
the S4, analysts said.
"Qualcomm's latest chips are getting good reviews from
carriers, which I think forced Samsung to switch in favour of
Qualcomm from Exynos in the S4," said KDB Daewoo's Song.
"There's even a possibility Apple may drop its own processor and
go for Qualcomm chips in some future devices."
Losing some of its hardware appeal and taking longer than
expected to come up with innovative products such as flexible or
wearable devices are additional challenges for Samsung, which is
getting only mixed reviews for its efforts to improve software
capability to integrate better with hardware.
In a recent review of the S4, Walt Mossberg, a gadget expert
for the Wall Street Journal, said Samsung's software was "often
gimmicky, duplicative of standard Android apps, or, in
some cases, only intermittently functional."
Despite the lukewarm reviews, consumers keep snapping up the
S4, according to carriers. For the first time in at least three
years, Samsung last year spent more on marketing than on
research and development, seeking to pick up market share in the
absence of new, competing models from Apple. And Samsung's
operating profit is seen topping Apple's this quarter for the
first time in years, J.P. Morgan analysts predict.
"There's not much left in terms of what you can do to really
differentiate your product as everybody's thinking something
similar - flexible or wearable," said NH Investment &
In late 2011, Samsung told analysts it planned to introduce
flexible displays on handsets "some time in 2012, hopefully the
earlier part than later", but a year later it said the
technology was still "under development." It again demonstrated
prototypes of flexible phones earlier this year, but executives
now say they can't disclose the timing of flexible smartphones.
Rivals are also moving fast. LG Electronics Inc,
the third-biggest smartphone maker in January-March on strong
sales of its high-end Optimus G model, said last month it
planned to introduce an unbreakable smartphone by the year-end.