Could Samsung, reportedly the ousted manufacturer of processors for Apple, be able to control the Silicon Valley company by putting it on a rationed supply of NAND flash memory? How should Apple respond to the danger?
Apple has been here before. And indeed finessed its way out of the situation quite neatly in the second half of the last decade. Although the clever way it played its cards then may yet have repurcussions in 2013. It could depend on length of executives' memories, pun intended.
in 2005 Apple pre-paid $1.25 billion to five NAND flash memory
suppliers to ensure they would be able to supply Apple with memory
through 2010. That was a five-year supply agreement (see Apple to pre-pay $1.25 billion for flash memory) that made sure Apple could continue its apparently inexorable rise as a mobile consumer electronics supplier. The five NAND flash memory suppliers were the same as those listed above although how the pre-payment was split between them was not revealed at the time.
also then proceeded to give suppliers periodic indications of its
estimated future needs so that the vendors could tailor
their manufacturing to meet its needs. The only problem was that towards the
end of the five-year agreement Apple was reportedly accused of consistently over-estimating
the need and then buying less product thus causing the flash memory vendors to be always in an
oversupply situation and unable to raise prices. These accusations
circulated in South Korea during 2009 (see Apple accused of NAND price manipulation) although it remained unclear whether this was simply happenstance due to the general economic malaise of the time or a deliberate ploy by Apple.
Here we are several years on and it looks like Apple needs to formulate
another NAND flash memory supply plan. However, this time Apple may need to put down several billion dollars rather than $1.25 billion.
But given what was reported to be going on in 2009 it is questionable how cooperative the likes of Samsung and SK Hynix would be. In the absence of a plan there is the possibility that Apple's top line production volumes will be limited by its ability to procure NAND flash memory and effectively fall under the control of NAND flash memory
makers and Samsung in particular.
If Apple is prepared to fund a NAND flash memory production plan the question then becomes whether Apple
can again spread that money around the industry to maintain multiple
competing suppliers – or whether it must back one supplier, perhaps
Micron Technology, and makes that one company its favored or even
captive NAND flash memory supplier?
Sometimes it's shocking how intertwined the supply chain is. But this is far from the first time a situation like this has come up.
If I recall correctly, IBM abruptly stopped buying disks from one specific vendor (Shugart, maybe?) which had a devastating effect on the supplier. That's the position Samsung is in.
The reverse risk to Apple is just as real. Antitrust laws may prohibit restraint of trade, but there are a lot of ways of holding back without going clearly afoul of the regulations.
The real interesting part here is that both Apple and Samsung stand to lose big from any kind of a supply war.
Do you really think it makes sense for Apple to essentially fund their largest competitor?
I do not see them destroying their product pipeline, though perhaps a slight delay. It was going to have to happen eventually, why not now?
Sure there is interdependence in many industries, but I have to imagine for Apple it was almost becoming uncomfortable.
They are also not destroying their whole supply chain, simply realigning it. That actually is good for the whole industry as it means not only can Apple build competitive advantage, but by moving supply out of Samsung which one could argue has far too high a concentration of Smartphone dollars on the supply side if Apple sticks with them, it grows supply chain competitors which helps other smart phone companies have access to top technology.
at some point there has to be an advantage to not being a dick, the way Apple has been. a company that genuinely has superior products does not destroy their whole supply chain and product pipeline as a defense against follower competition. playing such a defense game is tantamount to admitting your offense (innovation) is failing.
At some point there has to be an advantage in having captive fabs, otherwise no one would ever build any new ones. Samsung will reap the advantages of being more vertically integrated. Apple can certainly buy enough NAND for its use, but will simply pay more. If they are smart they will have at least two vendors. This situation is where Tim Cook can earn his pay.