Saturday, June 29, 2013

Messy Divorce: Apple and Samsung Relation is Difficult to Unwind

The Wall Street Journal just published a nice description of how Apple is trying to become less dependent on Samsung for its component, but having difficulty getting the components it needs elsewhere. Samsung is the best supplier for many components, and for some component it even extends its reach through ownership and alliances with alternative suppliers. In some areas Apple can leave Samsung (certain chips); in others it tries to turn around and finds that it meets Samsung again (large high-quality screens).

The reason for separating is clear enough: Apple and Samsung are competing intensely in the smartphone market, and the competition is so intense that it now takes place through prices (but as little as possible because both want to earn a profit), innovative features (with Samsung currently leading on the hardware side), and legal challenges (with Apple ahead in blocking products for patent violations). The smartphone market is seen as strategically important for both companies, and Apple may in fact be more dependent on it than Samsung.

Apple really does not want to lose this fight, and there are concerns that Samsung holds too much knowledge about Apple product development and market estimates through its role as a key supplier of technologies for its iPhones. The worry does not extend all the way to Samsung suddenly failing to deliver: Apple is a too valuable customer for Samsung to consider such dirty tricks. But even if Samsung delivers everything Apple asks for at competitive prices, Apple still has a problem if the cash and knowledge from that business helps Samsung strengthen its mobile phone business.

The situation is a familiar one from research on alliances. Alliances last longer if the partners need each other for an extended period of time. Their goals have to match each other, and both wanting to be the world’s dominant supplier of mobile phones is not a good example of goals that match. Apple is determined not to produce components itself; it is not that type of company. So it needs suppliers, and Apple products are so tightly integrated that in practice any supplier of critical components becomes an implicit alliance partner. When the alliance with one goes sour, Apple needs to look elsewhere.

But here it faces a problem that is becoming increasingly common in its industry. Rapid technological changes and extreme demands for factory size are making firms drop out of the market, so there are fewer suppliers available in many critical markets. Hitoshi Mitsuhashi, Joel Baum, and I published a paper showing that firms left alliances when better partners were available outside their current alliance. Apple versus Samsung is really just the reverse: Apple would like to leave, but the options outside Samsung are limited. So, we can expect the awkward on and off relationship to continue.

Lessin, Jessica E., Lorraine Luk, and Juro Osawa. Apple Finds It Difficult to Divorce Samsung. Wall Street Journal, June 28, 2013.