Apple’s move to cut Samsung reliance likely to backfire

Tim Cook Apple CEO

Apple’s move to reduce its reliance on Samsung will do more harm than good to the U.S. electronics giant as it is likely to encounter problems with quality parts supply, according to market analysts.

Amid the deepening global patent dispute with Samsung, Apple has sped up efforts to lower its heavy reliance on its biggest business rival in key components such as computer memory chips and flat-screens.

A leading local research firm also insisted that the diversification strategy will have a minor impact on Samsung, while Apple is increasingly at risk of having its supply chain deteriorate.

“If the Samsung-Apple relationship in parts falls apart, then Apple will experience serious parts sourcing problems. In contrast, Samsung looks quite safe even in the worst-case scenario,’’ Kim Hak-kyun, a chief analyst at KDB Daewoo Securities, said in a report Wednesday.

Apple is forecast to contribute around 4 percent to Samsung’s expected entire operating profit this year. The portion is expected to reach 6 percent in 2013, Kim wrote.

“Apple is approaching Taiwan Semiconductor Manufacturing Company (TSMC) to get more advanced mobile application processors (APs) in a bid to diversify its lines of supply and reduce its reliance on Samsung. But even though Apple buys whole mobile APs from TSMC, it will lower Samsung’s total operating profit by 2 percent. This isn’t a major blow for Samsung,’’ said the chief analyst.

The Korean firm is a dominant supplier for memory chips, mobile APs and displays and the industry’s sole parts supplier that guarantees on-time delivery, output commitment, better pricing with highly-qualified manufacturing technology.

Apple initially decided not to use Samsung’s flash-type memory chips in the latest iPhone 5. In retaliation, the Korean company decided to terminate a display sourcing deal with Apple due to its rigid supply chain structure, surprising the iPhone maker.

“Apple planned to stop using Samsung’s technology in its devices. But the ambitious plan seemingly failed as Apple agreed with Samsung to use its flash memory chips for the upcoming iPhone 5,’’ said a Samsung executive asking not to be identified citing the sensitivity of the issue.

He continued, “As far as I know, Apple accepted requests by Samsung to pay more to use its chips for i-devices. Currently, Apple has no option but to use Samsung technology. One obvious point is Apple needs Samsung and can’t completely drop Samsung from its client lists.’’

Under the new agreement, Samsung will account for between 10 and 15 percent of all Apple’s flash memory chip demand. “This is the business. By gaining more share in the global smartphone market, Samsung Electronics has begun building up its own supply chain management structure by lowering its previous heavy reliance on Apple,’’ said Kim of KDB Securities.

Samsung spokesman Ken Noh declined to comment.

By excluding Samsung in its parts-sourcing channels, the delivery timing for the new mini iPad sold via Apple’s online stores was delayed two weeks, while the delivery of its fourth-generation iPad was also delayed one week as initial volumes of the devices were “small,’’ according to analysts and fund managers.

“Supply remains very tight even in its strategic smartphone, the iPhone 5. The exclusion of Samsung in displays and other parts is one crucial reason. Apple doesn’t want to see a steep fall in its stock price and that means the company is readying itself to pay more to buy Samsung parts,’’ said an unnamed fund manager from a European investment bank in Seoul by telephone. <The Korea Times/Kim Yoo-chul>