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BLOG: Smartphone biz hits component barrier as Apple loses its throne

Jonny Evans | May 20, 2013
While the iPhone has been beaten out of its first place by Samsung devices, Apple has one big advantage: it makes software.

It will be interesting what effect a lower priced iPhone (rather than the availability of a now cheap but older model) will have on consumer purchasing will they begin buying iPhones more if prices fall?

In a way it doesn't matter. There's another problem.

Natural selection
Smartphone sales are booming, but the industry is heading toward its absolute limit when it comes to balance. As I predicted some time ago, component supply is not keeping up with the demand for these devices.

This is driving Apple and Samsung to compete in yet another way  they are now competing to secure supply of the components they need to deliver their devices, a struggle that's likely to put even more pressure on all the other players on the smartphone stage.

Apple's challenges include:

  • Apple has been in position to deliver massive orders to its component suppliers, but its reputation for agreeing tough deals and its insistence on high quality makes it a tough customer for some suppliers to work with.
  • Apple component suppliers are also under pressure to comply with the company's stated (and proved) commitment to improving working conditionsfor staff. That's an extra cost when doing business with Apple, one that also has the effect of putting the supplier's working conditions under public scrutiny.

Samsung's advantages include:

  • Samsung makes most of its components in-house.
  • The company is under no significant public/media pressure to improve working practices. Criticism of working conditions in its factories exists, but as a non-US firm with strong ties to its own government, the company is under zero pressure to improve. This means neither it nor its component suppliers are being tasked with delivering better working conditions.
  • This helps Samsung keep its products cheap — albeit at a hidden (though unproven) cost of suffering you won't see detailed in its product marketing videos. The company's massive market share means Samsung can deliver enormous orders to component suppliers, but with 80 percent of these being made in-house, it can afford to be a little more generous (than Apple) in its external deals.

"The next round of the post-patent battle for them will be over component supplies," Lee Sun-tae, an analyst at NH Investment & Securities told Reuters. "Who wins access to the best performing components in class in large quantity  that's the key ... and explains why Samsung is shopping for components more than ever."

Of course, those companies Samsung does choose to shop with will be a little cautious, as they know they are doing business with a firm that competes with them in component supply in their value chain. Apple may be able to exploit this by illustrating the competitive behavior of its former partner in the courts. It's hard to do business when your integrity is on trial. Though that particular sword cuts both ways.

 

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