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?
Apple goes to TSMC. Samsung says "Oh no you didn't!. Girl! find yo flash 'some place else!"
That would be too simplistic. Samsung and Apple have been very successful partners and not-withstanding lawsuits around curved edges and I doubt they would jeopardize their existing business. Apple most likely has contractual guarantees on flash supplies from Samsung.
I think that shortages of NAND flash are almost guaranteed later this year unless the entire world economy goes into recession. It's time for NAND producers to make a little money for a change. Another fast growing source of demand for NAND chips is the solid state drive market.
Apple is not vertically integrated because it chooses not to be. It's a business decision. The US government really has very little role in this strategic decision. US based Micron/Intel fabs produce NAND flash chips and we do have NAND flash being manufactured in the US.
Duane, that's an excellent point. But there are a whole bunch of human decisions that put companies behind the eight ball. Management execs aren't going to turn down huge business from Apple or IBM if it throws their model over into an 80/20 situation.
On the other hand, how many companies are there like ADI which I boasts its largest customer is 5 % of the business?
Tough calls... and I'd hate to be in their shoes!