Friday, October 6, 2017

Rivals Horizontally - Cozy Vertically

With the latest releases of the Apple X and the Samsung Galaxy 8, we expected pretty intense rivalry. Maybe not so much seeing how Samsung is one of the major suppliers of components for the Apple X. The WSJ reports that Samsung "stands to make $110 from for each top-of-the-line, $1,000 iPhone X that Apple sells." For example, Samsung "is the only significant manufacturer of the organic light-emitting diode, or OLED, displays Apple has adopted to create the iPhone X screen." Furthermore,
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.

This suggests to me that Samsung's real comparative advantage is in the cutting edge technologies embedded in these components. Like most electronics, I suspect there are substantial scale economies  (and perhaps learning curve effects) in the production of these components. It can lower its unit costs be producing ever more units. It has vertically integrated into assembling them into phones so as to move down this cost curve. It hardly cares whether these components are in its own phones or are sold to downstream rivals to be included in the rival's phones.

5 comments:

  1. As noted above, it can be assumed that there is a learning curve at play in the Samsung manufacturing realm. Learning curves can be defined in stating “as you produce more, you learn from the experience, and this experience helps you produce future units at a lower cost, meaning that current production lowers future costs (pg. 87).” This can be exemplified in the case of Samsung capturing a portion of the sales and profits resulting from latest releases of the Apple X phone as Samsung is the manufacturer of parts being used not only in their own product release but also their competitors. It is clear in this instance that for Apple it was a lower cost to purchase the product from Samsung than to develop and produce it themselves. Samsung is able to sell the parts to Apple for less than the cost to produce would be as they are producing more and benefitting from lower overall costs as a result of their learning curve characteristic. The increased sales of components by Samsung to their competitors can also be related to an increasing return to scale or economies of scale. It can be assumed that the long term costs of production fall as the outputs of production increase for Samsung, allowing them to remain profitable while selling components used in phones at lower costs over a long-run period of time.

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  2. It makes perfect sense for Apple to go with a company like Samsung. Samsung not only makes the best OLED technology on the market, but are also the only company that could keep up with the demand from Apple when it comes to the popularly of the iPhone. Apple was a leader in the smartphone industry for quite a while, but they have recently lost that position to Samsung mostly due to their ability to produce these OLED screens that companies like Apple use in their phones. When a company has to make a decision about cost it’s very important that they make the correct one when deciding between two different alternatives. (Froeb, McCann, Shore & Ward, 2016) In my opinion I think Apple made the correct choice for now by using existing technology from Samsung, rather than spending money on research and development to produce their own OLED technology, or finding another manufacture that probably wouldn’t be able to keep up with demand and would be a lower quality OLED. As a company it’s important to make the correct choice that will return the highest profit and since Samsung already has the technology it was the correct choice for make for Apple to keep using them. As stated above I think it’s the best decision for now since no other company would be able to fulfill these OLED orders and Apple doesn’t have the technology. The main downside for Apple is the increase of price per unit for these OLED displays from Samsung. They have doubled in price per unit, which has led to Apple increasing the price of their iPhones to consumers, which has made the new iPhones less attractive to even Apple fans. The iPhone is stating around $1,000 vs the Samsung S8 that starts off around $720. Samsung is able to offer their phone at a much lower price since they use their own displays on their phones. Apple will need to figure out a way to lower the price on future iPhones due to demand being lower than ever because of price being higher than ever on any iPhone. Apple we need to determine if investing in their own OLED technology will be profitable or decided to outsource their OLED demands to another company, but again people want the best when it comes to technology and currently Samsung has the best OLED.

    References


    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem solving approach. Boston, MA: Cengage Learning

    Welch, C. (2017, September 06). Apple in "urgent" need of finding iPhone OLED supplier besides Samsung. Retrieved from https://www.theverge.com/circuitbreaker/2017/9/6/16263060/apple-iphone-8-samsung-oled-supplier

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  3. As a professional in the wireless industry, there is a shift in the business model of the major carriers. Carriers are opening more dealer doors that corporate doors to reduce overhead and increase revenue. Apple has much lower profit margins in comparison to Samsung and other android platform handset manufacturers. Froeb et al (2014) teaches us that the law of diminishing marginal returns states that as you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines. I think its a brilliant strategy for Samsung to be on of the largest suppliers to one of its rivals.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial economics a problem solving approach. Boston, MA: Cengage Learning

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  4. Knowing this information, it is interesting to still consider Samsung and Apple rivals. If Samsung is producing components for Apple that prove to be very profitable, one would assume Samsung would want its “rival” to be successful. Either way, Samsung makes out pretty well. Perhaps Samsung’s cause for concern should be research and development by Apple to create the same product. If it makes sense for Apple to be able to produce its own components versus outsourcing, this in turn could give Apple another competitive advantage over Samsung. They may need to weigh their options, maybe using a break-even analysis or by marginal analysis, to evaluate if it would be a smart choice to invest capital into research in this area. I can imagine that cutting out part of Samsung’s profit through Apple would only further benefit Apple, if the price was right. Otherwise, due to Apple’s size, it may make sense for them to continue to outsource to Samsung. Since their cost to create the components is low and if Apple is a major consumer, Apple would have the economies of scale to bargain with Samsung for the lowest price. Regardless of giving profit to a rival, Apple may be more profitable outsourcing this component than if they were to invest time and money into research and development of doing it themselves.

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    Replies
    1. In the wireless industry, I have to say there is a lot of talk on which is the better device and even more so ‘who is using what device” It’s fascinating to see which way the trends or millennial will sway based off what celebrities, sports role models and what the current masses are using.
      I recall the day when my son came home from High School telling me he needs a new phone. In my mind this equated to his being lost or severely damaged. Neither was the case. He stated none of the girls in school will talk or date anyone with an android. I couldn’t believe what I heard! He then came over to show me how on an iPhone, if you message someone it’s blue but if it’s green that means you are interacting with someone with an android. Well of course I did what any mother would do and sat him down to go over what a leader is versus a follower. I showed him my phone a current Samsung Galaxy s7 user and this resulted an even quicker response of “mom I need a new phone”
      Samsung has great leverage being part of the IPhone manufacturing and producing cutting edge components. But will this this partnership win over some of those loyal iPhone users? Will some users become influenced and try out a Samsung Galaxy s8, or better yet an upcoming leaked product by Samsung known as the Galaxy X smartphone (Forbes) . Samsung’s President Koh Dong-jin confirmed that it will release a folding touch screen smartphone in 2018. Seems Samsung’s leading edge department has caused much concern for Apple who more recently partnered up with LG to work on a foldable OLED display too. Looks like Samsung has yet again caused concerns on the learning curve giving them an overall 2 year advantage with this game changer technology. (G. Kelly) my question is can both withstand to keep the high cost without impacting the bottom line? Currently iPhone 7 and 7plus remain the top sellers in 2017 .

      References:
      Gorden Kelly October 12, 2017 Apple leaks Confirm Radical New Smartphone www.forbes/tech/#cuttingedge.co

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