By Timothy W. Martin and Tripp Mickle
When the iPhone X goes on sale next month, Apple's Inc.'s rival,
Samsung Electronics Co., has good reason to hope it is a roaring
success.
The South Korean company's giant components division stands to
make more money from the parts it sells Apple for the
top-of-the-line, $1,000 iPhone X than from the parts for the
flagship Samsung Galaxy S8.
An analysis conducted by Counterpoint Technology Market Research
for The Wall Street Journal finds Samsung is likely to earn roughly
$4 billion more in revenue from iPhone X parts than from components
made for the Galaxy S8 in the 20 months after the new iPhones go on
sale Nov. 3. The majority of sales for a new smartphone occur in
the first 20 months after its debut.
The twist reflects a love-hate dynamic between the phone makers
that is one of the more unusual relationships in business. While
each company vies to get consumers to buy its gadgets, Samsung's
parts operation also stands to make billions of dollars supplying
screens and memory chips for the new iPhone -- parts that Apple
relies on for its most important product.
"These are two of the largest companies on the planet deeply
tied at the hip and directly competitive," said David Yoffie, a
professor at Harvard Business School, who has studied Apple and
serves on Intel Corp.'s board. "That makes this stand out compared
with almost any relationship you can think of."
Apple and Samsung are expected to be the world's two
most-profitable companies in 2017, excluding Chinese banks,
according to S&P Global Market Intelligence. And they will
depend on each other to get there. Apple needs Samsung's parts to
make the iPhones that accounted for two-thirds of the Cupertino,
Calif., company's $215.64 billion in revenue in fiscal 2016,
according to investment bank CLSA. Samsung needs Apple's orders to
fuel a component business that delivered about 35% of the South
Korean firm's total revenue of about $195 billion last year and
more than half of its $25.6 annual operating profit.
Samsung and Apple declined to comment for this article.
Business rivals sometimes depend on each other. LG Electronics
Inc., for example, produced its own home appliances while
simultaneously working with General Electric Co. Major oil
companies Royal Dutch Shell PLC and Exxon Mobil Corp. compete for
drilling rights in some markets and collaborate in others.
But the complex relationship between Apple and Samsung is
unique.
Their close association started more than a decade ago. Lee
Jae-yong -- the grandson of Samsung's founder -- personally
negotiated with Apple founder Steve Jobs to provide flash memory
for iPods, according to people familiar with the matter.
The relationship grew after Apple moved into selling
smartphones. Apple's immense demand for parts -- it sells more than
200 million iPhones a year -- limits the field of possible
suppliers. Samsung is one of a handful of semiconductor makers that
can make a small-sized chip crammed with extra memory capacity. And
it is the only significant manufacturer of the organic
light-emitting diode, or OLED, displays Apple has adopted to create
the iPhone X screen.
At meetings, Samsung executives are known to tell attendees who
pull out iPhones: "It's OK. They're our best client," according to
people familiar with the matter.
Samsung employees often refer to Apple with code names. One of
the most popular is "LO," short for "Lovely Opponent," people
familiar with the matter said. Apple's descriptor for Samsung,
meanwhile, is Samsung, according to people with knowledge of the
situation. Employees at the iPhone maker are often critical of its
rival's devices, pointing out software and hardware flaws behind
closed doors.
The relationship took an acrimonious turn in 2011, when Apple
sued Samsung over alleged patent infringement, accusing the Galaxy
S of ripping off the iPhone's design. Samsung countersued Apple
with its own patent-infringement allegations. Steve Jobs called it
a "thermonuclear" legal war.
Six years on, the U.S. lawsuit is unresolved. A federal appeals
court is set to determine this month whether a new jury trial is
necessary to resolve a case in which Samsung is challenging a
nearly $400 million award to Apple for design patent-infringement
damages.
Samsung Electronics is run by three chief executives, a
separation the company has said creates a sufficient firewall
between the smartphone and components units. The smartphone unit
buys parts from the components division, operating like they were
two separate businesses.
Apple will look to reduce its supply-chain reliance on Samsung,
according to industry analysts, and is working to diversify OLED
production by 2019 at the latest.
Apple has encouraged others to build out OLED production
operations, according to people familiar with its efforts,
including Sharp Corp. and Japan Display Inc. It is supporting Bain
Capital's bid for Toshiba Corp.'s memory-chip business, which would
give it an alternative supplier in that market.
But for now, the two remain close.
Apple and Samsung vacuum up nearly 95% of the smartphone
industry's profits, according to market researcher Strategy
Analytics. They can plow those earnings into
research-and-development and marketing, giving them an edge over
smaller smartphone players, said Neil Mawston of Strategy
Analytics. Apple also can use its size to buy up components, making
it tougher for others to get the supplies they need.
"Sleeping with the enemy," said CW Chung, a Seoul-based analyst
at Nomura, "might be a better strategy for them than hating each
other."
Write to Timothy W. Martin at timothy.martin@wsj.com and Tripp
Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
October 02, 2017 13:46 ET (17:46 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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