Samsung's Galaxy S4: The supply chain halo effect

Samsung's Galaxy S4: The supply chain halo effect

Summary: While Apple is the poster child for vertical integration because it integrates its hardware designs with its software and ecosystem, Samsung also has the same mojo with its supply chain.

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Samsung's Galaxy S4 launches on Thursday at an event in New York and while most folks will be handicapping the specifications, prospects for the device and the battle with Apple's iPhone there's a bigger business picture to frame.

That picture: Samsung's vertical integration with its semiconductor and display units.

While Apple is the poster child for vertical integration because it integrates its hardware designs with its software and ecosystem, Samsung also has the same mojo with its supply chain. Simply put, Samsung has its own flavor of Apple's halo effect. Apple coined the halo effect phrase to illustrate how iPod, iPhone and iPad sales can lead to Mac purchases.

This supply chain integration---Samsung makes end devices, semiconductors and screens---has been the primary focus among analysts in Korea. The general theory: Galaxy S4 sales will take off and drive demand for Samsung's parts businesses.

YoungChan Kim, an analyst at Shinhan Investment Corp., said in a research note:

With the rollout of the Galaxy S4, we expect earnings improvement for the vertically integrated parts divisions (semiconductor, display). Full-year operating profit is projected to grow 24.5% year over year thanks to the Galaxy S4 effect and earnings improvement in the parts divisions.

In other words, the Galaxy line of devices has its own halo effect for Samsung. One unit buys parts from the other. That reality is part of the reason why Apple has been working to diversify away from Samsung's parts---especially as it weighs an entry to the TV market.

Kim expects the initial round of Galaxy S4 units to be about 8 million units, up from the 6 million provided by the S3. Kim expects the Galaxy S4 to have annual sales of 70 million units, up 75 percent from the Galaxy S3. Kim added:

The Galaxy S4 will likely be a mega hit, bigger than the previous model, as there is no competition from the iPhone with the 5S model expected to be released in 3Q13 at the earliest.

Morgan Stanley analyst Shawn Kim has a similar view:

Confidence is running high at Samsung, which has set big goals for its supply chain with upside of 10mn units per month in terms of peak production by 3Q13. We estimate that this is about 25% higher than its predecessor Galaxy S3 peak monthly production run rate of about 8mn units. We expect S4 to go on sale from mid-April and be deployed at almost 400 carriers and 210 countries worldwide.

That Galaxy production will support processors, memory and Samsung's AMOLED business, which is 85 percent owned by Samsung Display. Here's a look at Morgan Stanley's unit estimates for Samsung's Galaxy S4 and the rest of the product family. 

galaxyunits031412

 

Topics: Samsung, Apple, Mobility, Smartphones, Bring Your Own Device

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41 comments
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  • I'm not sure you know what the "halo effect" is.

    Samsung selling more of its electronic components because it's selling more of its smartphones that it makes from those components is NOT a "halo effect" (cf http://www.investopedia.com/terms/h/halo-effect.asp#axzz2NWrUd89X). It's a mere follow-on of a diversified industrial corporation. In fact, since Apple, once Samsung's best customer, now purchases far few components from them, one could make the point that it's an anti-halo effect.

    Also, technically Samsung isn't really "vertically integrated," as it's electrical components companies weren't created to supply it's electronic devices divisions, but essentially the opposite.
    matthew_maurice
    • FFS bring back the ability to edit posts!

      Those last two "it's" should be "its", of course.
      matthew_maurice
    • "halo effect"

      That's Apple's way of saying Steve Jobs is still watching over them.
      KurrentEweser
    • Logically, the halo effect here is that other OEMs will buy Samsung's parts

      ... for their own copies of Samsung's devices.

      Now, if I were a competitor, why would I want to give Samsung my money?
      Vulpinemac
      • njhgjfut

        u my freind are the next maneger of apple
        Rakesh Naskar
        • I could wish I were

          I actually understood most of what Jobs spoke about. He wasn't always right, but he didn't waffle on his decisions, either. When he was proven wrong, he accepted that.
          Vulpinemac
    • I Agree

      I don't understand how this halo effect works for Samsung. So manufacturers will suddenly want parts from Samsung because they make a great smart phone? Like Samsung didn't already have the biggest name in the semiconductor business?

      At least with Apple it's different cause your Macbook Pro or iPhone can work with your Apple TV to display your tv screen's contents. With Apple you can share your app purchases across your iPad to your iPhone. With Apple you can see the tangible benefits of having vertical integration.

      How does a manufacturer see the tangible benefits of suddenly ordering parts from Samsung? If they weren't ordering from them to begin with it was probably because of cost or maybe they were competitors? There was probably a pretty damn good reason they weren't already ordering parts to begin with.
      Maha888
  • it is not always good to be self-contained

    Samsung producing everything themselves can only have temporary benefit. The thing is, they need to inject innovation from somewhere. With Apple moving off their production lines, Samsung no longer has any insight as to what the next iPhone might look like.

    Also, Apple might chose to surprise everyone with an earlier iPhone 5 replacement. It is not coincidence they keep so low profile and quiet recently.
    danbi
    • samsung s4

      I really don't think Apple can catch up.
      I had all of the galaxy phones and there's no no comparison bye far. Apple lovers stay with Apple. The galaxy is to much phone for apple users.
      juda1478
      • yeah...

        Kind of like how proper grammar is too much for Galaxy users.
        blueoktober
        • Juda1478

          Actually, Juda1478 has a decent point ~ But nit-pick on the grammar. #WhatAComeback
          TexasJul
          • Decent Point??

            What the heck? How does Juda1478 have a decent point? He's just another irrational Phandroid lover/Apple hater. Apple just had the greatest quarter any company has ever had and he's saying Apple "can't catch up"? Are you aware iPhone had double the profits for Galaxy S3 and Note 2? You can talk market share all you want, I'll take the money. The one with the fattest pockets at the end of the day wins every time.
            Maha888
          • You don't get any money

            Unless you're a shareholder. We're talking about the features of the phone. How well Apple did financially is irrelevant when we're talking about which phone is better
            dsa791
      • "The galaxy is to much phone for apple users."

        True. That dumb eye-scrolling thing is waaaaay too much! This Apple user wants features that are actually usable, not stupid gimmicks.
        Userama
        • Wow, a rare moment of honesty

          "This Apple user wants features that are actually usable"

          Yes, I can see why apple users want features that are actually usable considering that no apple product comes with usable features.

          When you start using a product that has all the usable features done right, the gimmicks are easy to ignore if you don't happen to want them.

          Maybe one day apple will deliver you features that are actually usable. I hear those are coming in 2014. 2015 at the latest. Well, maybe 2016.
          toddbottom3
          • Guess I'm easy to please.

            My iPhone 4 does everything I need/want it to, and does it elegantly and reliably. It doesn't even have Siri, which I actually consider semi-gimmicky. I also consider the 3.5-inch screen a perfect size for a pocketable phone. And, although Apple Maps got off to a shaky start, it's continuously improving. In fact, I prefer it to Google maps. So sorry, toddy---the features I have on my iPhone HAVE been done right, and are VERY usable.
            Userama
          • What you want/need...

            doesn't apply to everyone. I dropped the 4s like the steamer it is compared to the S3 as did MILLIONS of others. Apple is just too far behind and too simplistic to hold on much longer especially with Jobs gone. The innovation went with him. All you'll get is a half inch bigger screen every two years and things Samsung had two phones ago.
            archienj7@...
          • "...too simplistic..."

            For you, maybe. But not for the approx. 95% of the general population that are not techies.
            Userama
          • Considering the fact that the only time iPhone sales slow down...

            is when people are expecting a new model, there is little, if any, evidence that "... MILLIONS of others... dropped the 4s like the steamer it is...". Apple still sells more iPhones in one quarter than Samsung sells Galaxys in 6 months.
            Vulpinemac
          • Really Ignorant Post

            Little history lesson, Samsung finally caught Apple with the Galaxy S3. It took them 4 years. I have the Galaxy S2 and it is slow and not nearly as good a performer as even iPhone 4S. Quit talking like Samsung's always been there, you sound very arrogant.
            Maha888