Strange bedfellows

Relations sour between Apple, Korean parts suppliers

By Kim Yoo-chul

For Korean technology companies, Apple has been an odd bedfellow ― a foe in finished products like smartphones and touch-screen tablets and a friend in parts like liquid crystal display screens (LCDs) and memory chips. It remains to be seen whether this love-hate relationship will turn into a hate-hate one.

There are increasingly complaints among Korean components providers that Apple is exploiting its supremacy in consumer devices to strong-arm them in negotiations over price and volume.

While purchase deals in the technology industry follow a difficult and complicated process, the Koreans believe that Apple’s tactics are beginning to run against the limits of acceptability.

Apple has been a major customer for Korean technology firms like Samsung Electronics, LG Chem, LG Display and SK hynix, who have been providing parts used in iPhones and iPads.

Samsung, locked in an ugly intellectual property dispute with Apple over smartphones and tablets, provides chips and screens to its rival.

LG Display is also one of Apple’s biggest display suppliers and SK hynix, the world’s second-largest memory chip producer behind Samsung, also sells chips to the California-based company. LG Chem supplies it lithium-ion batteries, while LG Innotek and Samsung Electro-Mechanics are involved in the camera technology used in American firm’s devices.

For the Korean companies, providing these parts has been a source of pride for quite a while.

They now complain that Apple has been taking advantage of this.

One executive who comes from one of Apple’s local clients, who didn’t want his company to be named, even claimed that Apple’s ruthlessness in price negotiations would go against anti-trust laws if the rules were applied word-for-word.

The Korean companies are particularly sensitive in these times as chip and flat-screen markets are trapped in a prolonged slump.

``There are two sides of a coin. If you are a supplier, Apple is an important but frustrating business partner. But you also want to benefit from Apple’s marketing power. Still, there is no arguing that Apple has become a disruptive force,’’ he said, Tuesday.

``What Apple typically does is this. It will order a large amount of chips, screens and other parts for iPhones, iPads, MacBook Airs and other devices, but then it will buy only a small part of its order. This rattles the supply and demand cycles of these markets and eventually pulls prices down,’’ the executive added in a short telephone interview.

``Apple has asked us to produce millions of flat screens but bought only a few of them and the jump in inventory has cost us dearly. It eventually got to buy the rest of the screens at heavily-discounted prices,’’ according to the executive, who’s been selling computer chips to Apple.

Another industry executive, who also requested anonymity, agreed that Apple has become a bully.

``It is applying stricter qualification standards on parts before making a decision on whether to buy them. This is understandable. But I sometimes feel their demands are excessive, all part of a ploy to buy the parts at a bigger discount. We are frustrated but Apple is too important of a customer, so we can’t refuse,’’ he said, adding that it’s becoming harder to ignore Apple’s behavior when the market for mobile Internet devices is turning into a Samsung-Apple duopoly.

During the April-June period, Apple reported $35 billion in quarterly revenue and a 20 percent jump in net profit. It has been increasing component purchases from industry archrival Samsung since 2010.

This year, Apple is expected to buy at least $11 billion worth of Samsung flat-screens, flash memory chips and mobile application processors (APs) from $7.8 billion in 2011 and $6 billion in 2010.

``Apple’s local parts suppliers are allowing it to do whatever it wants. I think this is a problem. As Korea is home to leading chip and display-making companies, it’s not like Apple will be getting the same quality of products at those prices elsewhere,’’ one local analyst said in a recent investor relations meeting at SK hynix upon the chipmaker’s second quarter earnings.

Apple’s Korean representatives declined to comment when contacted for this story, as was true for Samsung Electronics, SK hynix and LG’s technology units.