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Apple’s New Samsung Deal Could Keep Competitor Prices High

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Apple (s aapl) is poised to strike a new deal with Samsung that will see Samsung, its sometime competitor, supply Apple with $7.8 billion worth of LCD panels, mobile processors, and NAND flash memory, according to a report in the Korea Economic Daily (via WSJ). The deal would make Apple Samsung’s single biggest customer.

It may seem odd that Apple would form such a close relationship with the maker of one the first and most lauded iPad competitors, the Android-powered (s goog) Galaxy Tab. But actually, if the deal is legitimate, it’s a wise move designed to keep other competitors at bay and extend a long-standing supplier relationship that’s been incredibly beneficial to Apple over the years.

Samsung has long provided flash memory for Apple devices, including storage modules used in its iPod, iPhone and iPad devices. Samsung also provided Apple with displays for its current iPad, alongside fellow Apple competitor/supplier LG. Recent rumors suggest Apple may be ordering Super PLS displays from Samsung, which provide a higher maximum resolution (1280×800) and superior visibility when compared to the iPad’s current display.

Apple’s deal with Samsung could help it stay ahead of competitors (including Samsung) with regards to tablet price. Apple is known to use bulk component ordering to strain the capacity of its suppliers, making similar components hard to come by and more expensive for other manufacturers who are often looking to buy in smaller batches (which leads to a higher price per unit). Kevin recently talked in more detail about how and why Apple does this in his piece on the Motorola Xoom’s high price tag, which was reportedly going on sale for $1,200.

While it’s true Apple is incurring some risk by partnering with a rival on components for its devices, it takes steps to ensure those risks are minimal. Part orders typically go out only a few months in advance of a product launch, which keeps inventory storage costs down, but also means Samsung doesn’t have time to formulate a timely, strategic response to Apple’s product releases. By the time the Tab came to market, even though it was among the first, the iPad had firmly secured its place as the market leader.

Apple’s bulk orders also leave suppliers faced with the irresistible temptation of short-term gains, though they hamstring their ability to bring their own competitive products to market in accepting those gains. To deal with the size of Apple’s component demands, Samsung will have to put its own device plans on hold if it has to choose between the two, since there’s far less risk in a sure-fire sale of components than in betting on fickle consumers to purchase a fully-built product at retail. Of course, Apple ends up enjoying much higher per-unit margins on the sale of each iPad than Samsung did on the sale of each iPad display, but viewed objectively, Apple is the one shouldering the lion’s share of the risk, and it makes financial sense for weaker brands to continue to allow it to do so.

It’s risk Apple is uniquely positioned to take on as a consumer electronics manufacturer, owing to its reputation for quality and a devoted fan base, and the overall strength of its brand. The iPad 2 is pretty much guaranteed to be a success; no other tablet coming to market can make the same claim. As long as that remains the case, fostering large-scale, supply-side relationships with its biggest competitors is actually the best possible way for Apple to proceed, as counter-intuitive as it may sound.

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5 Responses to “Apple’s New Samsung Deal Could Keep Competitor Prices High”

  1. timbucktoothed

    It makes perfect sense for both companies to help each other. There is no doubt that Samsung would make more money in short term supplying the parts to Apple. It’s important that Samsung get big orders because they fab and they spent billions on their fab plants. Samsung has this huge revenue but poor return on equity because well..that’s what they do. Most importantly, Samsung make best components. Samsung memory units and mobile displays are so ahead of the game in that if Apple don’t use them, their products would be bigger and power hungry because memory unit is too big and display dull while soaking a ton of amps. At the end, Samsung would reviest and make better components. And Apple keep printing money. By the way, buy EWY which is Korean ETF includes investments in Samsung Elec, Hyundai Auto and Posco steels.

  2. Massimo Allen

    Why is this a big deal, in the first place Comparing Galaxy Tablet with the Ipad is really comparing Apples and Oranges and to get the Galaxy you have to deal with the phone companies at a similar price point to Ipad! Secondly Apple will always be in a similar position with the suppliers, it is only the matter of time when the supplier will be tempted to make their own version of what ever it is they are providing components for. Last but the least the Business is Business, long live “Competition”, it is good for everyone including the manufacturer as it keeps the technology wheel turning.

  3. Laughing_Boy48

    Good for Apple. These rival companies keep swearing that they can undercut Apple prices by hundreds of dollars per device. I’d say it would almost be impossible for them to do such a thing unless they cut the quality considerably. Apple is one of the few companies that has enough reserve cash to buy components in huge quantities in advance to ensure the availability of necessary components for tens of millions of devices. If I were a major component manufacturer I wouldn’t even want to deal with smaller companies unless they were willing to pay 100% up front. If their products don’t sell, I wouldn’t want to be stuck with not getting paid.

    Samsung could probably make more easy money by just supplying parts to Apple instead of building its own competitor products. They could put their R&D at work on other things. The only drawback would be if Apple suddenly decided to switch component vendors, then it might be a problem. Of course, Samsung could just sell its components to other companies, although not in the same volume as Apple requires.