Why Is Samsung Talking About Its Place In Future Apple Inc. Products?

Before you go, we thought you'd like these...
Before you go close icon

I have been following Apple chip suppliers for quite a while. One phrase that I'm intimately familiar with after listening to earnings calls from countless Apple suppliers is, "we can't comment on any specific customers" -- or something to that effect. 

Companies tend to make these statements (or similar statements) due, at least in part, to pretty strict confidentiality agreements between them and Apple. Given how high-profile and powerful a customer Apple is, it's probably not a good idea to break such agreements. 

It puzzles me, then, that Samsung's semiconductor chief would outright confirm that it will build Apple's next-generation applications processors.

Why would Samsung do this?

Samsung isn't quite like other Apple suppliers
Most of those Apple suppliers I mentioned are typically chip or other component companies whose livelihoods depend on winning big deals such as slots in the iPhone and iPad. For example, chip-maker Broadcom derives over 10% of its revenue from sales of chips to Apple, meaning that if it loses an iPhone or an iPad, its financial results would be materially affected.

Samsung, however, is a very large, very powerful conglomerate that makes most of its money competing with Apple's products. Component supply to Apple is non-trivial, but it won't make or break the company.

Furthermore, Samsung enjoys a pretty unique position of being one of the few remaining leading-edge logic chip manufacturers. And, if what Samsung and others claim is true, Samsung is not only ahead of Taiwan Semiconductor in getting next-generation 14-nanometer silicon up and running, but its 14-nanometer technology looks superior -- at least with respect to chip density -- to its chief rival's.

So if Samsung's semiconductor chief spills the beans that the company supplying Apple, what exactly is Apple going to do? Leave? Taiwan Semiconductor already admitted that its 16-nanometer process is behind schedule and won't really begin ramping up until late 2015, making it too late for Apple's iPhone 6s and 6s Plus processors. It looks like Apple has no choice but to go with Samsung.

Mobile device woes
it isn't news to anyone following the consumer electronics industry that Samsung's operating profit from the sale of mobile devices is crumbling, with analyst Claire Kim reportedly stating, "We all know Samsung's third-quarter earnings will be pretty ugly."

The tablet market is generally weak (and increasingly dominated by commodity, low-margin devices), Samsung's premium smartphone lineup is probably losing share to Apple, and the low end of the smartphone market is being increasingly dominated up by various local Chinese vendors.

In other words, the huge Apple-like profits Samsung saw from the sale of mobile devices was seemingly an anomaly rather than anything sustainable over the long haul.

All that and a bag of chips
One area that has been fairly encouraging for Samsung has been its chip business. Samsung is the largest DRAM vendor on the planet, and recent pricing strength (due to a tight control of supply) in DRAM has allowed the company and peers such as Micron to profit handsomely.

However, Samsung's logic foundry business, which builds microprocessors and other complex chips, has apparently been struggling. ZDNet reported that Samsung's system LSI business (logic foundry and internal chip development) has "reported huge losses this year" as a result of the loss of the iPhone 6 and 6 Plus business to Taiwan Semiconductor.

It seems, though, that Samsung is aggressively trying to signal to investors that its 14-nanometer process will help it win significant logic share against Taiwan Semiconductor over the next couple years.

Foolish takeaway
All signs point to Samsung gaining a significant edge over Taiwan Semiconductor at the 14 and 16-nanometer node, which makes the idea that Samsung has won most, if not all, of Apple's business at this node pretty likely.

We will also see over the next year or so just how much leading-edge business beyond Apple that Samsung is ultimately able to take from Taiwan Semiconductor.

Apple Watch revealed: The real winner is inside
Apple recently revealed the product of its secret-development "dream team" -- Apple Watch. The secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see where the real money is to be made, just click here!

The article Why Is Samsung Talking About Its Place In Future Apple Inc. Products? originally appeared on Fool.com.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading