By Kim Yoo-chul
Apple may have agreed that it's impossible to divorce its top Korean partner and also bitter smartphone rival ― Samsung Electronics ― as the two companies are continuing with their business ties.
The strategic partnership will last for at least the next few years as it's highly unlikely the two will be involved in a new round of court battles, internationally, said officials Friday.
"Both companies need each other in the end. Amid the new order emerging in the technology industry, closer collaboration will benefit both. A new detente is coming and I believe that the partnership will be maintained over the next few years," said an executive at a local supplier for the company.
Simply put, "frenemies," a combination of friend and enemy according to the situation is the right word to explain the complex partnership between the two.
Apple is one of Samsung’s ― the world's top supplier in chips and displays ― top customers for processors, panels and memory chips. The patent disputes triggered the Silicon Valley-based company to seek to cut its purchase of components. Apple approached Taiwan Semiconductor Manufacturing Company (TSMC) and Japan Display to diversify its sourcing channels.
Samsung tried to fully resume its ties with Apple; however, the Korean company didn't have an "excuse" for the normalization of the partnership due to the international court battles.
As the two companies are approaching a peace treaty, the California-based firm is working with Samsung to get custom chips, displays and processors.
"Chinese consumer electronics companies have emerged as rivals for both companies. The two expanded markets for smartphones and tablets. Now they are being challenged and that means without collaboration, the two will lose their current leverage. Top management at the firms know this," said a top executive at an equipment supplier for Samsung.
According to officials familiar with both company’s business issues, the world’s biggest memory chipmaker has agreed to ship mobile DRAM chips to Apple for its next smartphone, tentatively known as the iPhone 6.
A Samsung spokesman neither confirmed nor denied the rumored partnership, saying the company doesn’t comment on client-related issues.
Apple is set to release the iPhone 6 sometime this month. The phone features an expanded surface screen using key components from partner companies in Asia.
The executive said Samsung Electronics will supply a chip using a finer 20-nanometer processing technology. The volume of the shipment, however, is still unknown as it is subject to iPhone 6 sales. Mobile DRAMs aren’t considered the brains of computing devices as they are not used to control an entire computing system.
Apple did not order memory chips from the Korean company for the iPhone 5 and iPhone 5s, instead sourcing them from Korea’s SK hynix and the United States’ Micron Technology, said market analysts.
According to estimates by Gartner, a U.S.-based market research firm, both technology giants collectively bought $53.7 billion worth of semiconductors last year.
The executives said Apple is also purchasing more Samsung displays for its other consumer devices.
The two firms recently signed a pact that ends all patent lawsuits outside of the United States, including the United Kingdom, France, Spain, Germany, Italy, South Korea, Japan, Australia and the Netherlands.
“The agreement does not involve any licensing arrangements and the companies are continuing to pursue the existing cases in U.S. courts,” said the two companies in a joint statement.
However, observers from the Korean label said Samsung Electronics Vice Chairman Lee Jae-yong is directly handling issues related to the company’s key business partners.
Over the last few years, Lee, the Samsung heir apparent has been bolstering his international presence by meeting with top executives from the company’s clients, especially as the company’s Group Chairman Lee Kun-hee is still recovering from a heart attack in May this year. Lee is also known as the key man to settle the company’s ongoing legal dispute with Microsoft.
Lee met with Apple CEO Tim Cook last month during a meeting with top executives at major technology companies in the United States.
“Because Samsung’s key smartphone business is showing signs of decline, the company should care more about its clients,” said one official.
One clear reason for the restoration of ties between the two electronics rivals is that they need each other.
"Samsung doesn’t want to see its relationship with Apple deteriorate now that its smartphone business is on a slow decline," said Noh Geun-chang, an analyst at HMC Investment and Securities.
For Apple, its Korean counterpart is a partner that it can’t afford to lose, especially with the emergence of Chinese mobile phone vendors.
The semiconductor industry entered a new paradigm that enables top-tier suppliers to pursue long-term structural improvement and higher and more stable profits, and this new detente will significantly benefit the multinational Korean company.
"As Apple is also jumping into wearable devices and car infotainment products, it will also benefit from the continuance of its business ties with Samsung,” said an official at a Samsung Group technology affiliate.
A sthe American company is being pressured to develop something new beyond its iPhones and iPads, it has no option but to adopt Samsung’s organic light-emitting diode screens.
Another reason for the detente between the two companies is Apple’s apparent failure to source complicated chips from TSMC. Apple initially contracted TSMC for processors as part of its sourcing diversification strategy.
“But those attempts brought mixed results. TSMC is still being questioned over its ability to deliver high-end chips,” said Noh.
With regard to microprocessors, a critical component that controls key applications running in smartphones and tablets, the Macintosh creators expects to order next-generation A9-branded chips from TSMC, albeit the order volume won't be significant.
“Samsung knows that Apple does not have sufficient leverage to negotiate prices of chip supplements. However, because the Korean conglomerate wants to keep Apple, a high-profile client, it offered to supply both memory and logic chips to the Silicon Valley company with price discounts but under a long-term contract,” said the equipment supplier executive.
Bernstein Research recently said although Samsung is losing share this year to TSMC in logic chips, the company is nevertheless maximizing its logic production capacity utilization, to surpass TSMC in the 14-nanometer level FinFET chip-making technology.
Most notably, all of Apple’s custom A-series chips to date were built at Samsung’s silicon fabrication operation based in Austin, Texas. Samsung Electronics will also supply Apple with chips from its plant in Xian, China.
Samsung officials say the improvement in the company’s relations with Apple is going to offset the effects of the slowdown in its smartphone business.
“Samsung’s profit axis will be moved from smartphones to memory chips next year as the company gradually migrates to thinner chip technologies,” Woori Investment, another local brokerage, said.
Samsung investor relations chief Robert Yi told analysts and investors during a second quarter earnings announcement that the company expects to surpass rivals in chip shipment growth in the third quarter.