Vertical integration, as I have noted in previous blogs, is the way to domination and maximum profitability. That is unless someone else has beaten you to the punch with an even bettermodel. Apple is now executing a product and manufacturing supplier strategy that will force Samsung to lose lots of money and then ultimately split the Semiconductor Group from the larger Samsung Corporate Umbrella. Apple owns the Commanding Heights of the new Computer Ecosystem and has mapped out the more profitable Virtual Vertical Manufacturing Structure that allows it to invest just a portion of the CapEx that traditional suppliers require. Hence, they are growing in profitability at a greater rate than traditional vertically integrated companies. Samsung will need to split off its Semiconductor Unit soon or they will face even greater losses because they will be put in an untenable situation by Apple’s soon to be executed actions.
Most of my recent blog posts have been focused on Apple for one reason. They are re-writing the book on how to run a superior company, from products to manufacturing, and this is having a dramatic impact in the semiconductor industry playing field. Many people focus on the products – which are outstanding. But the other side of the house is cranking on a model that will dramatically increase profit margins at the expense of a multi-sourced supplier base that will ultimately succumb to their wishes (any of their wishes). The readers must understand that Apple can punish as well as incentivize suppliers at their choosing. As I outlined in a blog a few weeks ago Apple is the “swing consumer” of the semiconductor industry (see Apple Plays Saudi Arabia’s Role in the Semiconductor Market). Therefore, they dictate market pricing for many components.
As many of our readers are aware, Apple started a legal process several months ago to keep Samsung Tablets out of worldwide markets because the product looked similar to the iPAD. Samsung is the only company in the world that can challenge Apple on a vertical cost basis and they have the added advantage of having corporate subsidies. Apple’s goal in the coming year is to make Samsung retreat from the consumer market and back into semiconductors or risk losing an excessive amount of money.
The Global Semiconductor market is going through some softness as of late. However, DRAM is very sick and NAND is doing just OK – overall. The picture, I contend, is different if we look vendor by vendor. In a downturn, the largest semiconductor vendor with the biggest CapeEx gets hit worse than the smallest guy. So Samsung is now feeling maximum pain.
Recently, Apple let it be known that it was shifting DRAM and NAND out of Samsung to Toshiba and Elpida. Here’s where it gets interesting. Apple, as recently discussed, has over 70% gross margins in its iPhone 4S so they can afford to pay a little more to certain suppliers that they seek to gain favor with at the expense of a “Bad Supplier.” I contend that Apple is probably paying higher ASPs to Toshiba and Elpida in the short run to get more of their capacity and to penalize Samsung. Samsung is now looking at reduced demand and the prospect of selling out DRAM and NAND at a lower ASP to the gray market. Remember in down times, gray markets have ASPs substantially below contract price. A lot of bleeding is going on. (see Samsung Sees Weaker Earnings)
From a long-term point of view, it is difficult for Samsung to plan for new fabs if they don’t know how much demand they can expect from Apple. And now, Apple is raising the competitive profile of Toshiba and Elpida at Samsung’s expense. If Samsung gets out of the Tablet and Phone market, then that will free Apple to expand into the 25% of the market (phones) that will be like green fields with 70%+ gross margins. And all this occurs by just paying Toshiba and Elpida a few extra cents per part.
Splittsville Time is Approaching.
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