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Why Apple rival Samsung also wins if iPhone X is a hit

South Korean giant stands to make billions of dollars supplying screens and chips for competitor's new phone

Timothy W Martin & Tripp Mickle | WSJ 

iPhones, smartphones
Samsung is likely to earn about $4 billion more in revenue making parts for the iPhone X than from the parts it makes for its own flagship Galaxy S8 handset

Smartphone titans and Electronics Co. are arch rivals in one of the biggest consumer-product arenas.

But when Apple’s debuts next month, both will be hoping it succeeds.

The twist reflects a love-hate dynamic that is one of the more unusual relationships in business. While each company vies to get consumers to buy its gadgets, Samsung’s giant components operation also stands to make billions of dollars supplying screens and memory chips for the highest-end new iPhone — parts that Apple relies on for its most important product.

Indeed, an analysis conducted by Counterpoint Technology Market Research for The Wall Street Journal finds is likely to earn about 

$4 billion more in revenue making parts for the than from the parts it makes for its own flagship Galaxy S8 handset 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.

Counterpoint expects Apple will sell 130 million units, earning $110 on each through the summer of 2019, while Galaxy S8’s global sales are expected to be 50 million, earning $202 each from components such as displays and chips in its first 20 months of sales, according to estimates based on a projected bill of materials. The Counterpoint analysis includes parts sales from Electronics plus two affiliates that make batteries and capacitors.

The findings show a highly dependent corporate relationship that dominates the top tier of the global market for mobile devices.

“These are two of the largest 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 are expected to be the world’s two most profitable 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. 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 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. 

Oil majors Royal Dutch Shell PLC and Exxon Mobil Corp. compete for drilling rights in some markets and partner in others. But the complex relationship between Apple and 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 Apple’s immense demand for parts—it sells more than 200 million iPhones a year—limits the field of possible suppliers. 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 screen. At meetings, 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.

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 over alleged patent infringement, accusing the Galaxy S of ripping off the iPhone’s design. 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 is challenging a nearly $400 million award to Apple for design patent infringement damages.

Electronics is run by three chief executives, a separation the company has said creates a sufficient firewall between the smartphone and components units. 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 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.”

First Published: Tue, October 03 2017. 01:50 IST
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