Apple (NASDAQ:AAPL) is often praised for the control it exerts over its supply chain. The influence the company wields over suppliers is noteworthy because this allows Apple to build a competitive product, price it at or near the MSRP of its competitors, and still earn a profit margin of 25% or more, while other consumer technology companies get by with 10%.
That secret weapon goes a long way toward explaining a telling statistic reported in Forbes: Apple, which had 9% of total unit sales volume for the mobile phone industry in the fourth quarter of 2011, managed to rake in a 40% share of revenue, and an incredible 75% of the profits.
However, despite the apparent control that Apple exerts over its suppliers, the costumer electronics industry is a highly complex one and relationships aren’t always as straightforward as they might seem. The high investment required to design and build specialized components that are used in a multitude of devices has led to a situation where manufacturers often supply components for their own devices as well as those offered by competitors. Partners on one initiative might be bitter rivals on another, and as two companies are signing an agreement to work together one project, their legal divisions may be gearing up to sue each other over another product.
A dichotomy of interests
Apple has been making things difficult for manufacturers of Intel‘s (NASDAQ:INTC) Ultrabooks, the class of super-slim notebooks championed by Intel as competitors to Apple’s highly successful MacBook Air line. The Cupertino, Calif., company locked up so much of the specialized, CNC (computer numerical control) capacity needed to manufacture the MacBook Air’s aluminum chassis that competitors were switching their design to cheaper and less durable plastic in order to assure availability.
Then Pegatron, a company that had been making the Asus Zenbook—an aluminum-bodied Ultrabook that looked very similar to the MacBook Air—was reportedly threatened with losing Apple as a customer unless it ceased Zenbook production. Pegatron acquiesced and Asus will be forced to look for another manufacturing partner.
At the same time that this battle is going on, Apple is one of Intel’s biggest customers, using Intel chips in all of its desktop and notebook computers. Intel would also dearly love to have Apple switch its mobile products from ARM processors to new Intel Medfield chips.
Strange alliances in TV, cameraphone manufacturing
We recently wrote about the bloodbath that has been Sony‘s (NYSE:SNE) TV business, with South Korean manufacturer Samsung (PINK:SSNLF) playing a major role in wrestling the LCD TV crown away. Despite that rivalry, the two companies partnered on joint production of LCD panels for televisions, investing $3.3 billion together. Sony announced it was exiting the venture this year, but will continue its relationship by buying TV panels from Samsung.
Speaking of Sony, as the company moves forward with Sony Mobile, after completing its $1.5 billion takeover of Sony Ericsson, its Android smartphones will be competing against Apple’s iPhone 4s—which is equipped with a Sony-manufactured camera. The iPhone’s 8-megapixel camera has made it the second most popular cameraphone on photo sharing website Flickr, the poster child for a growing trend that sees camera phones pushing compact digital cameras (such as the 18 models offered by Sony) toward irrelevance.
Legal skirmishes and partnerships
To see just how convoluted things can get, look no further than the relationship between Samsung and Apple. The two companies, which are competitors in the tablet and smartphone market, have repeatedly traded lawsuits in the U.S. and around the world. Apple accuses Samsung of ripping off design elements, while Samsung has tried to halt the sale of Apple devices in some countries by claiming that its 3G patents had been violated. The Verge, which has been tracking the Apple and Samsung legal battles, has posted 39 updates since last April.
Even as they repeatedly bloody each other in court and fight for market share with competing products, Engadget points out, in 2010, Apple was Samsung’s second largest client (after Sony), after spending some $5.7 billion on Samsung components, ranging from flash memory to processors and displays. That stake was reportedly increased to $7.8 billion in 2011, making Apple Samsung’s single largest customer.
Between patents, licensing of operating systems, processor design, and specialized manufacturing plants, nothing is as it seems when it comes to the consumer electronics market. The winners and losers in any situation may not be as obvious as the headlines may indicate. And Apple’s apparent ability to manipulate suppliers to its advantage may not last forever.
As of this writing, Brad Moon did not own a position in any of the stocks named here.