Samsung And Apple: One Strange Relationship

Includes: AAPL, SSNLF
by: Stephen Rosenman

This has to be the oddest relationship in the business world. Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) are locked in battle all over the world—rivals in the marketplace, litigants in courtrooms in San Jose, Australia, and Germany.

But in the workplace, Samsung is Apple's key supplier. Whether it's the iPhone or iPad or MacBook Air, Apple is giving Samsung its business. Samsung is firmly entrenched in the Apple supply chain. Samsung manufactures the A5 used in Apple's 4s iPhone and contributes NAND flash and DRAM components. Samsung supplies the iPad's high-resolution screen as well as processor and flash storage.

Estimates go as high as $11 billion of Samsung in Apple's line-up for 2012. That's a lot of moola to spend on your fiercest rival. Considering that Apple's COGS is $83 billion for trailing 12 months, Samsung is in one sweet spot.

Apple is Samsung's number one customer. Yet, Samsung is Apple's number one competitor too. Can Samsung have it both ways?

The Samsung-Apple dynamic gets crazier still. According to Apple, Samsung stole its ideas and markets illegal knockoff versions of the iPhone and iPad. Extend the thought. Isn't Apple supplying the cash to finance Samsung's Galaxy line, in effect, abetting the alleged theft? On the one hand, Apple purchased billions of dollars worth of panels and chips from Samsung, while contemporaneously requesting $2.5 billion in restitution for patent infringement. While I am sympathetic to Apple, the continued presence of Samsung components in iProducts sends mixed signals.

There are deeper risks for Apple. Several nightmare scenarios come to mind. What if Samsung stops supplying Apple or slows its order fulfillment? What if the delivered parts are flawed?

Apple may be seeing the handwriting. Digitimes reports Apple is shifting more of its iPad panels from Samsung to Sharp and LG Display. It's about time. It's never wise to sleep with your enemy, especially a conniving one.

Disclosure: I am long AAPL.

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