Apple’s New Samsung Deal Could Keep Competitor Prices High

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Apple 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 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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