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?
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.
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.
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.
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.
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!
Micron makes about one seventh of the NAND flash market by value.
I am sure they would be eager to supply Apple.
My point is that ALL five NAND flash makers have made efforts not to over-invest in production capacity over the last five years. As such it is possible that in 2013 NAND flash memory could be undersupplied.
Shortages of memory will drive prices up and could even introduce the dreaded A word....allocation.
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.
As a UK citizen and resident I look across the water at the USA, and am always impressed by its ability to invent and innovate to bring useful and world changing products to the market. Apple epitomizes this aspect of the USA's can do attitude.
I am disappointed that the USA has allowed a situation to develop where a major player such as Apple is forced to hunt-the-marketplace to feed itself. When you're in the jungle you're also on the menu, no matter what size you are.
There is a clear advantage, at a cost, in vertical-integration. I think that the USA needs to address the question 'Why can't and we do it here, and why are we not doing it here?'. This is question for both the US Administration and its industry. After all the health of the USA is inextricably linked to the health of its industry. If the USA is proud of Apple and likes the taste, then plant an orchard and grow some more because the future is out-there.
It is very much like when someone says
'but education is so expensive'. My answer is 'If you think education is expensive try ignorance'.
There is a quote to which I often refer,'it is better to strike a candle than curse the dark'.
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.
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.