Samsung To Benefit If iPhone X Is a Success -- WSJ

By Timothy W. Martin and Tripp Mickle Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 3, 2017).

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When the iPhone X goes on sale next month, Apple's Inc.'s rival, Samsung Electronics Co., has good reason to hope it is a roaring success.

The South Korean company's giant components division stands to make $110 from the parts it sells Apple for each top-of-the-line, $1,000 iPhone X sold.

The fact reflects a love-hate dynamic between the phone makers that is one of the more unusual relationships in business. While each company vies to get consumers to buy its gadgets, Samsung's parts operation also stands to make billions of dollars supplying screens and memory chips for the new iPhone -- parts that Apple relies on for its most important product.

"These are two of the largest companies on the planet deeply tied at the hip and directly competitive," said David Yoffie, a professor at Harvard Business School, who has studied Apple and serves on Intel Corp.'s board. "That makes this stand out compared with almost any relationship you can think of."

An analysis conducted by Counterpoint Technology Market Research for The Wall Street Journal finds Samsung is likely to earn roughly $4 billion more in revenue from iPhone X parts than from components made for the Galaxy S8 in the 20 months after the new iPhones go on sale Nov. 3. The majority of sales for a new smartphone occur in the first 20 months after its debut.

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Apple and Samsung are expected to be the world's two most-profitable companies in 2017, excluding Chinese banks, according to S&P Global Market Intelligence. And they will depend on each other to get there. Apple needs Samsung's parts to make the iPhones that accounted for two-thirds of the Cupertino, Calif., company's $215.64 billion in revenue in fiscal 2016, according to investment bank CLSA. Samsung needs Apple's orders to fuel a component business that delivered about 35% of the South Korean firm's total revenue of about $195 billion last year and more than half of its $25.6 annual operating profit.

Samsung and Apple declined to comment for this article.

Business rivals sometimes depend on each other. LG Electronics Inc., for example, produced its own home appliances while simultaneously working with General Electric Co. Major oil companies Royal Dutch Shell PLC and Exxon Mobil Corp. compete for drilling rights in some markets and collaborate in others.

But the complex relationship between Apple and Samsung is unique.

Their close association started more than a decade ago. Lee Jae-yong -- the grandson of Samsung's founder -- personally negotiated with Apple founder Steve Jobs to provide flash memory for iPods, according to people familiar with the matter.

The relationship grew after Apple moved into selling smartphones. Apple's immense demand for parts -- it sells more than 200 million iPhones a year -- limits the field of possible suppliers. Samsung is one of a handful of semiconductor makers that can make a small-sized chip crammed with extra memory capacity. And it is the only significant manufacturer of the organic light-emitting diode, or OLED, displays Apple has adopted to create the iPhone X screen.

At meetings, Samsung executives are known to tell attendees who pull out iPhones: "It's OK. They're our best client," according to people familiar with the matter.

Samsung employees often refer to Apple with code names. One of the most popular is "LO," short for "Lovely Opponent," people familiar with the matter said. Apple's descriptor for Samsung, meanwhile, is Samsung, according to people with knowledge of the situation. Employees at the iPhone maker are often critical of its rival's devices, pointing out software and hardware flaws behind closed doors.

The relationship took an acrimonious turn in 2011, when Apple sued Samsung over alleged patent infringement, accusing the Galaxy S of ripping off the iPhone's design. Samsung countersued Apple with its own patent-infringement allegations. Steve Jobs called it a "thermonuclear" legal war.

Six years on, the U.S. lawsuit is unresolved. A federal appeals court is set to determine this month whether a new jury trial is necessary to resolve a case in which Samsung is challenging a nearly $400 million award to Apple for design patent-infringement damages.

Samsung Electronics is run by three chief executives, a separation the company has said creates a sufficient firewall between the smartphone and components units. The smartphone unit buys parts from the components division, operating like they were two separate businesses.

Apple will look to reduce its supply-chain reliance on Samsung, according to industry analysts, and is working to diversify OLED production by 2019 at the latest.

Apple has encouraged others to build out OLED production operations, according to people familiar with its efforts, including Sharp Corp. and Japan Display Inc. It is supporting Bain Capital's bid for Toshiba Corp.'s memory-chip business, which would give it an alternative supplier in that market.

But for now, the two remain close.

Apple and Samsung vacuum up nearly 95% of the smartphone industry's profits, according to market researcher Strategy Analytics. They can plow those earnings into research-and-development and marketing, giving them an edge over smaller smartphone players, said Neil Mawston of Strategy Analytics. Apple also can use its size to buy up components, making it tougher for others to get the supplies they need.

"Sleeping with the enemy," said CW Chung, a Seoul-based analyst at Nomura, "might be a better strategy for them than hating each other."

Write to Timothy W. Martin at timothy.martin@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

October 03, 2017 02:47 ET (06:47 GMT)