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Samsung Announces It Will Stop Shipping Apple Displays

This article is more than 10 years old.

The Korea Times is reporting that Samsung has said that it will stop shipping LCD displays to be used on the various Apple iDevices. It would appear that this isn't about the recent legal bad blood between the two companies: at least that's what they say. Rather, it's that Samsung cannot afford to continue to supply the Cupertino based firm:

Samsung Display said Monday that it will terminate its contract with Apple and no longer supply liquid crystal display (LCD) panels to its long time partner.

The point seems to be that Apple is demanding prices that Samsung just isn't willing to offer. The economics of this being really rather interesting.

Even before the coming launch of the iPad Mini, the price per pixel have more than halved from the iPad 2 to the new iPad.

Research firm DisplaySearch said the LCD display used in the new iPad, which has a resolution of 2048x1536 millimeters, sports 3.14 million pixels priced at $.00003 per pixel. The one for the iPad 2 was priced at $.000063 per pixel.

That's the sort of price fall that is being seen. The actual reason given is:

The Cupertino, California-based firm has been lowering its reliance on Samsung-manufactured displays for use in its popular i-branded devices as it is leveraging its influence to source components from Samsung’s rivals attracted by better pricing.

“We are unable to supply our flat-screens to Apple with huge price discounts. Samsung has already cut our portion of shipments to Apple and next year we will stop shipping displays,” said a senior Samsung source, asking not to be named, Monday.

And then there's this crucial point:

Samsung Display was the top supplier to Apple as of the end of the first six months of this year, shipping over 15 million LCDs, followed by its biggest rival LG Display with 12.5 million and Japan’s Sharp with 2.8 million, said market research firm DisplaySearch.

The little bit of economics being the cost structure of manufacturing such LCD screens. The manufacturing of anything exists along a spectrum. At one end you have things like silicon chips themselves. These are, essentially, made from boiled sand* so the parts cost of a chip is near nothing. The Si metal is around $30 to $40 a kg these days. However, it costs $5 billion and up to build the chip fab to actually make the chip on this very cheap piece of metal. So each chip has a huge capital cost attached to the few cents of metal. At the other end might be something like a restaurant meal. The standard assumption in the industry is that the raw food will cost as much as 30% of the final selling price. In between you've got all sorts of mixtures and matches. A new major car design costs $1 billion for example, which has to be amortised over the production run of that model.

LCDs are a lot further towards the silicon chip end of that range than they are the restaurant end. So if you've already got a production line installed which can make them then you've already paid up the majority of the costs of making those screens. And guess what: Sharp does indeed have such a line and Sharp is darn near bust at present. So much so that Foxconn, Apple's assembler, is negotiating to take a stake of up to 20% in that screen business.

As Sharp already has that sunk cost of the production line it can afford, in order to gain just cash flow, to be very keen indeed on its pricing. OK, perhaps not "afford", but will be in an attempt to stay afloat. This obviously puts substantial pressure on what Apple is willing to pay Samsung. However, Samsung can supply instead its own smartphone business with screens and thus it can price, internally, to recover that capital investment. In a manner that Sharp's pricing may well not enable it to amortise its capital investment.

This is a common enough pricing outcome in a business with huge capital costs and low marginal costs. There's no particular indication that this move of Apple's away from Samsung as a screen supplier is anything other than just the playing out of these economic points. Rather than, say, a general distancing of the two companies as a result of the endless court battles on several continents.

Update: It should be noted that a Samsung spokesman has denied this story. Although the denial is couched in the past tense, not the future. That Samsung has not tried to cut Apple supplies, rather than it will not try to. Up to you how you take that. The economics of the business remain as above.

*Yes, this is hyperbole