by Darrell Etherington
Samsung (OTC:SSNLF) has reportedly increased the price of the mobile processors it manufactures for Apple’s iOS devices by 20 percent, according to South Korean daily newspaper Chosun Ilbo (via MarketWatch), which says it received the information with someone familiar with negotiations between the two firms. Apple (NASDAQ:AAPL) apparently wanted to walk away rather than accept the new terms, according to the source, but had no replacement supplier to take over manufacturing.
Apple has looked to other suppliers to begin supplementing its mobile processor needs, including Taiwan-based TSMC (NYSE:TSM), which is rumored to begin working on quad-core chips for both mobile devices and possibly future Macs according to a report from mid-October. Another Taiwanese firm, Kinsus Interconnect Technology Corporation, is said to be also on board to take over some chip manufacturing duties, and the Taiwanese suppliers were reportedly attractive to Apple because they could produce processors for about 10 percent less than Samsung. Given that this price hike is indeed now going into effect, as the Chosun Ilbo report argues, suddenly those plans to shift manufacturing become even more urgent for Apple, since the 10 percent cost savings was based on previous pricing.
The biggest challenge for Apple will be making sure other manufacturers can produce chips at sufficient volumes for its needs. Apple reportedly purchased over 200 million processors from Samsung this year, and if it can maintain its past and current device sales growth trends, the volumes it requires will only increase. Samsung has a contract to continue manufacturing at least some of these components for Apple throughout 2014, according to the report, and earlier information puts the timeline for building chips with TSMC and other Taiwanese suppliers at late 2013, so there may be some crossover time during which volume burdens are split, if pricing does in fact eventually end the processor supply relationship between Apple and Samsung.
Earlier this year, The Korea Times reported that Samsung would be cutting its LCD supplier relationship with Apple, but Samsung quickly moved to refute those claims. Apple has been adding new suppliers to its pool of display panel partners, including Sharp and LG, but it does indeed continue to use Samsung panels in its latest products, including the iPad mini.
In its latest earnings call, Apple repeatedly brought up lower product margins as a reason for more cautious guidance on the next quarter, and it’s possible that at the time this was a key issue informing that outlook. If true, this is also exactly the kind of problem that explains why Apple is making decisions to do things like drop Google Maps from its platform: regardless of whether you’re talking about software or hardware, giving any one competitor/partner too much of a role on its devices leads to issues like this one.