Whew! With all the litigation between Apple (NASDAQ:AAPL) and Samsung, and all the accusations of "lack of innovation" on Samsung's (OTC:SSNLF) part, it's easy to forget that Apple actually relies on Samsung for the technical side of a great deal of its products. Just how does Apple rely on Samsung? Well, let's take a look:
While Apple designs its own systems-on-chip for its iPhone and iPad (but licenses the actual core design from ARM Holdings (NASDAQ:ARMH)), it relies on Samsung to actually fabricate the chips. While there are other options for chip fabrication available on the market, such as Taiwan Semiconductor Manufacturing Corporation (NYSE:TSM) and GlobalFoundries, Samsung is able to dedicate a good portion of its foundry to servicing Apple.
The dedicated foundries have multiple customers, and it is unlikely that TSMC or Global Foundries would risk its business model by booting out multiple customers, even if these are smaller clients, in order to reserve a large part of capacity for a single customer. Samsung, on the other hand, is happy to reserve significant capacity for Apple. Further, as Samsung is one of the leaders in chip fabrication, it is really Apple's best option at this point.
From the other side of the argument, if Apple were to suddenly pack its bag and leave Samsung, then the Korean firm faces the risk of having significant unused capacity, as well as losing a very nice revenue stream.
Samsung most likely doesn't want to stop building Apple's chips, nor does Apple want Samsung to stop building them, especially as Apple's alleged attempts to secure significant exclusive capacity at TSMC failed.
Arguably the most critical part of Apple's latest product push in the tablet and PC space, high resolution screens are also part of this very interesting love-hate relationship. While Samsung isn't the only supplier of ultra-high resolution screens to Apple (LG (OTC:LGCIF) is another), Apple seems to regard Samsung as the most reliable vendor of these displays. It should come as no surprise as Samsung's technological expertise and sheer force spans multiple areas of the consumer electronics world.
Again, as Apple is frequently pushing the boundries of screen quality and resolutions in its products, Samsung is more than happy to accept Apple's money for these screens. On the flip side, while Apple's a fairly high volume customer, it wouldn't kill Samsung to lose Apple's display business. Conversely, Apple would have a very tough time if Samsung cut it off here as the report in the aforementioned link noted that these screens have proven very difficult to produce and Samsung is by far the best at maintaining quality and supplying in volume.
Flash Memory Solutions
Surprise! Samsung is also one of the world leaders in supplying flash memory. According to Anandtech, Samsung's solid state drive solutions are by far the most compatible with Apple's products. The site also frequently recommends the Samsung "SSD 830" for Apple users looking to upgrade their current non-retina MacBooks (the retina MacBooks use Samsung's embedded version of this drive).
Now, flash solutions are available from a host of other companies. The Intel-Micron Flash Technologies joint venture between Intel (NASDAQ:INTC) and Micron (NASDAQ:MU) is also a leading supplier of flash memory and would likely be very happy to supply Apple with a finely tuned, high quality flash solution for its MacBooks. So Apple doesn't need Samsung here, and given the volume of NAND that Samsung ships to numerous solid state drive vendors as well as via its own branded products, Samsung doesn't really need Apple.
While everybody is so fixated on the software patents and physical design "innovations" of these products, I like to take a more technical view of the situation. Samsung is a juggernaut; it produces DRAM, screens, CPUs, and flash memory that are all integral components to any computing product. There is real innovation in developing a next generation manufacturing process for semiconductors, and there is certainly innovation in being able to produce high quality displays in sufficient volume.
That being said, Apple's a great customer to Samsung and it is likely that Samsung is able to justify its capital expenditures at least in part due to Apple.
In short, these two companies need each other, and despite the quibbling in court over phone designs, these two will likely continue this dramatic love/hate relationship for a good long while.
Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.