The smartphone and tablet market continue to produce impressive growth and will persist in doing so over the next two years. The market should then transition from the growth stage to the maturity stage. During this stage, the key to success will be industry players' ability to differentiate their products from the competition and capture profit via margin expansion in a setting of production and manufacturing adaptations. Investors should be cognizant of the possible changes that may occur as the industry evolves and strategize their positions accordingly. For smartphones and tablets, this phase will be defined by key players looking to decrease their reliance on component suppliers, differentiate themselves via internally developed components, and hence expand margins. Apple (AAPL) and Samsung (SSNLF.PK) have already started to set the stage for this transition, albeit what we see today is just the beginning of a major transition that will unfold in 2014 and 2015. In anticipation of such a change, the best investment strategy may be to invest in Apple and Samsung directly and decrease exposure to key suppliers.
According to Engadget, "there aren't many major surprises to be found" in the Nexus 10 teardown. There is one surprise that investors may want to pay attention to. It screams Samsung inside-out. The battery, processor, and flash memory are all made by Samsung. Of particular note is that Samsung has decided to use its own internally developed NAND flash chip over that of SanDisk's (SNDK), used in the Galaxy Tab 7.0 and 10.0.
I previously wrote an article detailing how with the Samsung Galaxy SIII, Samsung decided to test its own LTE chip in the Korea model. I made the argument that Samsung plans to have more designs with its own baseband chip, and will slowly broaden the use of its own LTE chip in the S4 and S5 at the expense of using Qualcomm's (QCOM) in the coming years.
The trend of using more internally developed components at Samsung explains why Apple recently hired Jim Mergard, the 16-year chip veteran who previously worked at AMD and Samsung. As the smartphone and tablet market matures, the more components these two juggernauts can internally develop, the more competitive they can be. Samsung clearly has the edge in this category. However, I would not be surprised to see Apple level the playing field via acquisitions of smaller component suppliers as the market becomes more saturated in late 2014/2015. As a result, other component suppliers will be cut out.
Apple's rift with Samsung, as well as problems with supply constraints, has taught the company that its biggest challenge may be its suppliers. These complex relationships have placed its bottom line at risk. Apple's recent attempt to decrease its reliance on Samsung is just the beginning of larger strategy that will ultimately impact other component suppliers.
In other words, expect both companies to try and reduce their dependence on component suppliers in the coming years. Don't expect to see this play out in 2013, as both companies will still be focused on growth. In the meantime, expect this landscape to change and invest wisely as 2013 comes to a close. I am not saying that all or even a majority of components will be internally developed, but that it will be interesting to see which ones Apple and Samsung choose to develop on their own. Which component suppliers are you willing to make a bet on? Could this impact larger component suppliers such as Broadcom (BRCM), Qualcomm, and Hynix Semiconductor (HXSCF.PK)? Are smaller component suppliers such as TriQuint Semiconductor (TQNT), RF Mico Devices (RFMD), Cirrus Logic (CRUS), or Skyworks Solutions (SWKS) buy-out targets, or is Apple more likely to buy smaller start-ups? Only time will tell.
As for me, I am playing Samsung's switch to internally developed products by investing in Silicon Motion Technologies Corp (SIMO), a company that provides Samsung with both LTE transceivers and NAND/eMMC flash controllers for Samsung's internally developed products. This allows SIMO to benefit as Samsung chooses to incorporate more of its own internal flash and LTE components into future products. The Nexus 10, Kindle Fire HD 7'', and 8.9'' all have a Samsung NAND/eMMC flash chip. This should play out well for SIMO, and I bet that its Q4 guidance was conservative. As for Apple, the safest play is to invest in the company itself.