A lot has been made of Google's (GOOG) $12.5b acquisition of Motorola and how they have started to compete with their Android partners in the manufacturing of tablets and handsets. In short, these skeptics believe that Google will face a huge backlash from its Android partners because these partners won't like Google competing with them head-to-head. I think this argument falls flat on its face. Companies have had relationships like the one Google will have with Motorola -- one company supplies a critical component for a customer's product, and at the same time competes with the company in that product -- for a long time.
In this article I will briefly outline these various partnerships and show that the Google-Motorola tie up can follow the models currently in use. Specifically, I will highlight the relationship of four large companies -- Samsung (SSNLF.PK), Hyundai (HYMLF.PK), Panasonic (PC) and Sony (SNE) -- each of which supply critical components to their competitors and compete with these customers in the very same product line.
Samsung supplies critical components for much of the smartphone world. Their chips form the core for Apple's (AAPL) iPhone and iPad, RIM's (RIMM) Blackberry devices, and Nokia (NOK). I will now go through each of the above companies, and show which parts Samsung supplies for them.
- Apple -- Samsung supplies the DRAM memory, Flash Memory, and CPU for the iPhone and iPad. Additionally, it has been rumored that they supply the screen technology for the iPad.
- RIM -- Samsung supplies the RAM and the flash memory for the Blackberry Torch
- Nokia -- Samsung supplies the display components for the Nokia Lumia 900 (new Nokia Windows Phone (MSFT) powered phone).
This list does not represent the full extent of Samsung's supply efforts, both in the handset and these particular OEM's specifically, or across their other businesses in general. However, I could easily and for free obtain the reliable information presented above, and therefore decided to present the information. I think this brief sampling could give you a strong taste as to Samsungs crucial involvement in the global supply chain for smartphone components. This despite the fact that they compete heavily with all of the above companies directly in the market they help these companies create products for.
Hyundai, under its subsidiary, Hyundai Mobis, supplies major components for the auto industry. They supply major components for three of the largest automakers -- GM (GM), Ford (F), and Daimler (DDAIF) -- as I will now detail.
- GM -- Hyundai Mobis has recently signed a $1b contract to supply rear LED lights for GM cars, and has also signed a $240mm contract to supply integrated center stacks to GM.
- Ford -- Hyundai supplies for Ford, amongst many other companies critical automotive safety equipment for their cars.
- Daimler -- Hyundai agreed to supply an advanced battery system to Daimler worth some $30mm, and have increased their efforts in expanding into this market.
Hyundai happily supplies all of these components despite the fact that it competes directly with all of the above brands in the auto industry. In fact, we do not get any indication that the above parts will not get installed in cars that compete head-to-head with Hyundai, and we get the distinct impression that Hyundai sold the parts with no strings attached. This marks yet another example, in a different sector, of a company supplying critical components for a competitor and competing with them in the same market.
Panasonic and Sony
Panasonic and Sony recently announced a joint venture to develop OLED televisions both from the development and production end. Again, Panasonic and Sony, two major players in the highly competitive TV set business have joined forces to develop the above said technology.
We see from the relationships highlighted that companies do not have a problem in supplying a direct competitor with a crucial component. Companies that act as customers do not worry that their supplier/competitor will give themselves an unfair advantage with the parts they supply. Google will follow the same model with Android, both supplying a critical component (the OS), while using it themselves for their own hardware needs. Obviously Google will need to implement tight controls to make sure they don't cross any lines in this area. They have already taken a giant, and correct first step, by operating Motorola as a separate business, which should give comfort to their OEM customers that Google won't give themselves an unfair advantage when it comes to Android development. Most importantly, one of the biggest Android partners -- Samsung -- has a long established practice of both supplying and competing, albeit from the other end, with its customers/competitors. Additionally, LG, another large Android partner also has similar relationships with its customers/competitors.
We should also note that Google needs its partners to continue to push the Android ecosystem forward by making sure they iterate on it, and load it on as many devices as possible. Google will have its best interests by assuring that Android is on as many devices as possible, to assure continued success for their core products (Search, Youtube, Chrome), which generate the vast majority of their revenue, and will not want to shoot itself in the foot by upsetting these important partners. With the continued improvement of Android both by Google and its partners, Google will have the ability to refine Android, allowing it produce higher quality products under its Motorola brand.
I have already written at length regarding the future potential for Google in this area, and for more details see there. But to pluck out one point -- global smartphone shipment will hit around 600mm this year, and will continue to grow with the continued decrease in cost, which will expand their potential audience. Google will not want to mess up this giant opportunity, and will surely make sure their partners and customers remain happy.
Disclosure: I am long GOOG.