Samsung Plays Two Sides with Apple

Electronics research firm iFixit pulled apart a new Apple (NASDAQ: AAPL) iPad and found parts from Qualcomm (NASDAQ: QCOM), Broadcom (NASDAQ: BRCM) and Apple’s greatest nemesis: Samsung. It is an example of how in the complex world of consumer electronics and smartphones strange alliances can be formed between enemies. Samsung and Apple have been in battles country by country across the globe to block the sales of one another’s products. The most recent was in a court in the Hague, which refused a Samsung Electronics bid to block sales of Apple products because they may infringe on the South Korean company’s intellectual property. Apple will be able to sell its products in the Netherlands.

The motive of immediate profits is probably at the core of the relationship, or lack of one between Apple and Samsung. Apple is well known for driving supplier bargains with two goals. One is component costs that help keep its precious gross margins, so well admired on Wall St., high. The other is to work with vendors that can manufacture extremely high-quality components very quickly. Apple often underestimates demand for its products on the low side and must rush to keep supply in balance with surges in demand. Apple reaches its goals. Samsung gets a prized position as an Apple supplier and large sales because of the success of Apple products.

Samsung’s smartphone and tablet divisions have goals in conflict with its electronics manufacturing operations. The South Korean company is the only maker of smartphones and tablet PCs in the world that has been able to challenge the primacy of Apple’s products. Part of the reason is Samsung’s adroitness as a clever designer of products. Another is its massive balance sheet, which allows it tremendous manufacturing capacity, the ability to take risks, a large marketing budget and strong relationships with carriers. Samsung’s prowess have even allowed it to take a smartphone market share lead in China, the world’s largest wireless market. It is one of the few places Apple has to play catch-up to gain market share.

Samsung has taken a simple set of gambles. The first is that a relationship with Apple is probably substantially profitable. The other is that it can at least match Apple at Apple’s own game, which is to convince consumers that it has the superior products in the smartphone and tablet PC markets.

Douglas A. McIntyre