Is Apple about to feel Samsung squeeze on iPhone costs?

Is Apple about to feel Samsung squeeze on iPhone costs?

Summary: A Jefferies analyst estimates that the bill of materials for the iPhone is going higher. Samsung plays a big role in two out of the three primary cost drivers for its rival.

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Apple and Samsung are obviously fierce rivals on smartphones and tablets, but the more interesting duel is likely to happen out of the public eye with displays, processors and supply chain.

According to Jefferies analyst Peter Misek, Apple has a bevy of key supply chain transitions ahead. These transitions are likely to raise the bill of materials to make upcoming iPhones and crimp profit margins. Apple executives noted that the company's profit margins would slip going forward.

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Misek estimates that the iPhone 6 bill of materials will be at least 5 percent higher than the iPhone 5. Meanwhile, average selling prices will fall as Apple launches a low-cost iPhone for emerging markets. Bottom line on margins is that Misek sees a gross margin "divot" of 33 percent in the June quarter of 2014.

For Apple's most recent March quarter, gross margins were 37.5 percent, below the 38.63 percent in the December quarter.

Why will margins fall more than 4 points in a year? Misek noted that Apple will have to transition to OLED screens in a series of steps and move to new partners to manufacture processors. Samsung sits right in the middle of both transitions and can squeeze Apple.

Here are the major parts of the iPhone in terms of bill of materials.

Display: Misek said that Apple will have to switch from in-cell screen technology to on-cell. Why in-cell, which cuts the numbers of layers needed to make a display, doesn't ramp well to a 4.8-inch screen. As a result, Apple may move back to on-cell technology, which is more like a display sandwich, and invest in OLED screens going forward.

Misek said:

Apple is having to switch from in-cell to on-cell for the iPhone 6 as in-cell is proving unable to ramp to 4.8”. This new technology is unproven and Apple will incur significant costs to ramp production. We also believe that this is a stopgap technology in front of OLED. We believe it will take Apple and partners two years or more to commercialize OLED as the OLED market for smaller displays is effectively controlled by Samsung who will not supply Apple. In the meantime both LG Display and Japan Display will be forced to be on a dual track for screen technologies for Apple.

However, this transition will raise screen prices by 10 percent to 25 percent for Apple.

Processors: Apple is trying to switch processor manufacturing completely to TSMC and away from Samsung. The problem: Apple need Samsung for its older chips and can't cut over production. Misek said Samsung will start raising prices on legacy chips in the summer which will raise Apple's bill of materials another 20 percent to 30 percent.

Memory: NAND pricing has been solid and is likely to jump 20 percent for Apple. Misek said:

Based on our estimates Apple generates 11% of its operating profits from arbitraging NAND. It uses long-term price and volume contracts to secure supply and price. We believe these contracts are about to roll off and could see 20% or higher price increases.

Overall, Apple is going to see higher iPhone manufacturing costs. Samsung will be a primary reason.

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Topics: Apple, iPhone, iPad, Samsung, Tech Industry

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116 comments
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  • didn't we already read this fud?

    "Samsung will rise prices for Apple"

    Hasn't happened before, not likely to happen in future. Prices of components usually go down.
    danbi
    • It already happened.

      Gross margins have already dropped. Just because the price of the iPhone is not higher doesn't mean the price for apple is not higher.
      Jean-Pierre-
      • And just because Gross Margin drops doesn't mean costs are higher.

        I'll posit that Gross Margins are falling because Apple is selling lots of older, lower-priced iPhone 4 & 4S. These devices are retailing, in the US at least, for 0$ and $99. Even with the carrier subsidy, that's a lot less than the $199 they used to command. If anything, after production runs of tens of millions, these devices surely have much lower costs now than early in their production timelines. In addition, the iPad Mini has had a gross margin "significantly below the corporate average" since it's debut, and Apple is selling more of them than expected.

        Maybe Misek is right, but I doubt it. http://www.cultofmac.com/215736/a-history-of-horrible-apple-predictions-from-peter-misek/ Hey Pete, where's that AppleTV you predicted last year?
        matthew_maurice
        • You're leaving out the suppliers

          Don't forget, that a supplier raising their costs due to unforseen, or even raising costs of their own can pass those costs onto Apple, especially if you're one of the few companies in the world that can give you what you need.

          Apple on the other hand has to compete with an ever increasing level of competition, so Apple has the choice to keep prices competitive and take a hit on margines, or raise the price to compensate, and risk losing sales.
          William Farrel
          • Suppliers

            Maybe it's time for Apple to buy US parts or "maybe" build US facilities for their products. It would be a really big selling feature to become an all American computer company. I am sure local state and the federal government would be lineing up at their front door to buy as would many people who maybe in the past were not Apple fans, but the idea of getting an all American computer would trump any resistance.
            Michael852
          • Precisely What Has to Happen!

            Right now with Samsung producing the only parts in iDevices "Made in America" (Processors & Memory), Apple's riding Samsung's FTZ (Foreign Trade Zone) Tax and Duty Free Benefits on sales in America. The Reality is not that Apple is changing to TSMC of their own free will. It's that Samsung is having a hard time furnishing their own parts needs, having just Doubled Apple's March 2013 Quarter smartphone sales. That's even in the quarter prior to Galaxy S4 Launch. Which should be reduced sales like Apple experiences.

            When push comes to shove.... who you going to supply parts to 1st? Certainly not your biggest competitor, who's trying to compete by suing you out of business!

            Samsung is not renewing Apple's American parts contracts. Even though they will again spend another $4 Billion in CAPeX in Austin Texas alone for expansion of production to help supply other Apple competitors (Google, Microsoft, LG, Qualcomm, Nvidia, etc). What's more is that Samsung (spent $43 Billion of profits on CAPeX last year globally) is our biggest Corporate Investor here in the USA. They routinely take Top CiCi Award and are expanding both Software R&D in Silicon Valley and Chip Design as well. On top of all that they pay themselves for almost all their Construction Costs (Samsung built 'The Burj Dubai' you know?) and product parts cost. They also get Tax and Duty Free breaks to bring the materials into the US to make them with.

            As a totally outsourced manufacturer, Apple is now facing the same problems Dell, HP, Cisco, Gateway, Microsoft and other US based device and Auto makers are facing. But..... here's the reality for all of them; having parts made in foreign factories for you, is proving not to be so smart after all. Especially since the they're not playing on an even field. So what really has to happen is that our Government needs to... EVEN IT!!! .....by not only giving those same hefty Tax and Duty Free Benefits to American Companies that invest here, but even better terms. Instead of just handing them out to the Toyota, Kia, Samsung, BMW, Hyundai, etc foreign based companies that Invest Here!!!!

            Reduce the taxes on US based Corporations and companies like Apple can afford to bring offshore CASH back here and build factories, instead of paying the Chinese Companies (Honhai/Foxconn) to make them and put them all together outside of the US. If our government can give benefits to foreign companies investing here, why not give those benefits to our companies? So they can hire more highly skilled workers out of jobs right here in America instead!!! ^_*
            KronJohn
          • seriously?

            @KronJohn - So these companies have already scammed and schemed their way out of paying US taxes, and your answer is to cut their taxes....
            Brilliant....Absolutely positively so brilliant that it appears to have gone around the corner into Stupidville.
            mjf2112
          • You Are the a Permanent Resident of Stupidville Then!

            Logically speaking, if you aren't getting any of that Apple Cash back in circulation and you want to benefit Americans, you have to incentivise these companies to do so!

            If you don't, then it's countries like Ireland that are taking advantage of it now. I'm talking American companies.... not Foreign based companies. Our government has long given incentives to foreign companies to come here and invest in America. By giving them Tax breaks and Duty Free status in Foreign Trade Zones. Who in turn hire Americans. It brings badly needed jobs back into our own economy Mr Stupid and if you can't figure that out, then you're probably on the receiving end of government handouts in the form of unemployment, SSI, Welfare or some other social service that will never ever give any returns! .......they're not really FREE and those people don't pay any taxes either! ;-P

            But..... if you bring money into this country that wasn't here before and paying it to people actually working, they in turn pay taxes and purchase goods to keep that money in circulation. Obviously you've never studied Business, Economics or how best to incentivise corporations into turning their wealth into benefiting their own sales. You only have to study Germany (one of few countries with a trade surplus with China to figure out. They did exactly what I'm saying and they don't only export Volkswagens and Trains to China either. They export finished products to both China and good old USA! :D

            http://www.guardian.co.uk/business/2013/feb/08/germany-trade-surplus-exports-imports

            We only wish we had a trade surplus like Germany does today!
            http://www.tradingeconomics.com/germany/balance-of-trade

            China and Germany alone constitute the two greatest exporters in the World. They do it by keeping their factories open, giving corporations TAX BREAKS. China too.... props up PRC owned businesses, while keeping their currency tied down into lower value than it should be!

            If America ever wants to have a trade surplus again.... we have to be willing to incentivise not only foreign investment here, but our own American based companies too!!! ^_* .......or all of us will be stuck here in Stupidville with YOU!

            http://econintersect.com/wordpress/?p=1390
            KronJohn
          • Got news for you

            Those people taking government handouts....They do have to play taxes.
            67cougargt
          • IDIOT!

            SSI IS FROM TAXES! YOU DON'T PAY TAXES WHEN YOUR INCOME COMES FROM SOCIAL PROGRAMS U IDIOT!
            Brian Pex
          • Don't waste your time

            This guy is an anti business moron. I applaud Apple for keeping taxes LEGALLY out of the hands of the idiots in Washington. You want jobs here? Be job friendly. Only an idiot company would want to do business here.. wake up
            Brian Pex
          • GOOD KRON JOHN

            Just to be clear, I am with u! LOL
            Brian Pex
          • Either way, you're screwed on the taxes

            Since you're not getting anything from them on taxes in the first place, cutting their taxes won't have any net effect on tax income. But if you look at a bigger picture, this gives the incentive to allow US corps to take their businesses back home. That means, more jobs for local citizens. Isn't that a better deal?
            syockit
          • problems for apple

            Good post
            A couple of points
            1 How can apple even think of making low end smartphones when their supply chain has such a stranglehold over them
            2 even with tax breaks for US companies, without much more automation of their manufacturing process, I don't see how Apple could possibly make products as cheaply as Foxconn, especially since Foxconn is similarly automating its manufacturing processes. US wages are just too high
            3 how can you selectively reduce tax breaks for companies like apple, for if you dis so for all, the US tax take would take a massive hit. Also there may be cries of protectionism. Also surely its a good thing to encourage inward investment in the US by offering tax breaks
            rzw30
          • Suing out of business.

            I don't think that was Apple's strategy at all. I think they saw this coming and they were looking for leverage to keep their margins higher.
            PolymorphicNinja
          • BS

            Most phone buyers will not spend a buck more for a device just because it is manufactured in America. For one, production costs, especially the wages npart of it, are going to be significantly higher. But it is a nice idea though.
            JonWayn
      • Gross margins means GROSS MARGINS

        They're not down just because of the iPhone, but also due to other devices, such as the iPad. You have to remember that the iPad mini is very probably cannibalizing a fair percentage of overall iPad sales and the iPad mini does not carry the same profit margins that the full-sized version does.

        Yes, I do agree that Samsung is an issue--Samsung managed to make itself "irreplaceable" to Apple, and then levered that position to create direct competition to Apple's products by knowing exactly what was going into Apple's products. Even if you discount the opinion that Samsung 'copied' Apple, the mere fact that a simple analysis of parts ordered gives you the ability to know what your customer is making allows you advance information on how to compete with it. In other words, Apple trusted Samsung to do the right thing and Samsung screwed Apple over.

        So, Apple is now spreading its orders over a broader range of component manufacturers, which ultimately means they won't get the quantity discounts they enjoyed from Samsung. Samsung itself, in order to try and retain at least some of the profits from Apple is subsequently raising the prices on the components they still supply--only exacerbating the rivalry and causing them to lose even more of Apple's business.

        Apple has the ability to design processors and custom chips in-house, but they lack the ability to manufacture them. Up to now that has not been an issue because it is always cheaper to buy off-the-shelf parts (albeit you can still specify the acceptable quality of those parts) than it is to manufacture your own. Honestly, that's how both Apple and IBM effectively created the desktop computer market. Now, one company is going out of its way to force another into direct, component-for-component competition, and if Apple chooses to play that game, Samsung could well be the loser. Apple is noted for doing things differently and while their profit margins may slip, their quality and originality may rise.
        Vulpinemac
        • lol

          So Apple builds it's devices using Samsung parts and you are telling us that Samsung is copying Apple? Oh, yea the rectangle with rounded corners thing... I forgot.

          No they're rivals and don't need to cooperate so unless some liberal passes a "Samsung-Apple buddy-buddy law" they should be able to do what they want. The market will level.
          LarsDennert
          • It really is amazing not just how wilfully

            but how proudly ignorant some people are. Trade dress has been explained many times, but some folks wear their willful ignorance like some badge of accomplishment or special award.
            baggins_z
          • Nice to see that you failed Reading Comprehension.

            You can copy a concept without copying the device itself. Tell me: How many smartphones had Samsung RELEASED before Apple announced the iPhone?
            Vulpinemac