Samsung (SSNLF, Financial) recently secured a small stake in Sharp in order to have constant and stable access to display panels. Sharp supplies LCD display panels to leading smart phone and tablet developers such as Apple (AAPL, Financial) and Samsung. Apple now faces a serious threat, as it sources nearly 30% of display panels from Sharp. This may lead to Apple losing control over its supply chain, thus jeopardizing its profit margins in the long run. Apple is making a conscious effort to widen its supplier base and move away from Samsung in order to reduce dependence on its fiercest rival in the smartphone and tablet space. Nonetheless, this strategic move by Samsung has left Apple thinking, thus it is imperative for potential investors to comprehend the impact of this move on Apple.
Impact on Apple
The recent investment in Sharp by Samsung can pose a serious threat to Apple in the long run. Apple is considering trimming down its dependence on Samsung for supplies, as Samsung is also one its prime competitors. However, Samsung’s investment (3% stake) in Sharp that also supplies display panels to Apple, will force Apple to re-think the entire supply chain strategy.
Samsung’s stake in Sharp will enable it a stable access to display panels. Apple, being the largest player in the industry, controls a tight ship over its suppliers; however, having to struggle with Samsung over production capacity and volume will relinquish its hold. As the smartphone industry grows and diversifies with new entrants, existing players will strive hard to diversify the supply chain to sustain competitive advantage. Samsung’s growing smartphone business and the recently announced backward integration will force Apple to re-strategize in order to avoid losing further control over its vendors. A 3% stake is not very threatening; however, it now pushes Apple to think out of the box to establish new supply chain partnerships for a steady and reliable access of display panels.
More Pressure on Apple
It is imperative to highlight the long-term impact of this move. Apple is already considering diversifying its supply chain, as Samsung is gaining huge momentum in the smartphone space. Samsung, also being a supplier to Apple, will always favor to keep its own factories loaded in case of a shortage. Apple in the past pressured several suppliers by investing in production to control the cost structure; nonetheless, such a strategy could never work with a massive player like Samsung. Smaller suppliers such as Sharp could always be manipulated by Apple to ensure stable supplies at a low cost; however, Samsung buying a stake in Sharp has once again restrained Apple from a diversified supplier base.
Over the years, Apple always had a competitive edge over its peers and consistently maintained high margins through massive bargaining power. With Samsung’s aggressive play in the smart phone market and several new entrants, now may not allow Apple to enforce such power on its suppliers like before. This will eventually lead to shrinking margins for many of its product categories going forward.
Potential Impact on the Stock Price
In 2012, Apple consciously made a move to diversify its supplier base due to Samsung’s rapid growth in the smartphone market. It was evident to the iPhone maker that in a scenario of supply shortage, Apple could be left wanting with Samsung first fulfilling its own requirements. The ongoing patent dispute between the two giants already provides enough incentive to Samsung to cut Apple from the source. It is noteworthy; Samsung is an exclusive provider of microprocessors needed to assemble iPhone and iPads. The microprocessors contribute more than 25% to the total manufacturing cost for both iPhone and iPad. Hence, diversification in the supplier base will allow Apple to hedge the supply risk and continue to enjoy high margins.
With the growing smartphone and tablet market, it will be imperative for all players to have a wider supplier base in order to satisfy demand. The impact on the stock price could be realized by Apple, if going forward Samsung’s stake in Sharp results in shrinking margin for the iPhone. Apple currently enjoys a healthy 53% gross margin on iPhone. With the iPhone being the driving force behind Apple's success, if the margins were to fall below 50%, then there could be a heavy downside in the stock price.
