Whatever the jury decides at the end of Apple Inc. (AAPL)'s trial against Samsung Electronics Co., Apple's deep ties to Samsung are becoming more apparent even as the two companies clash in court.
As the trial enters its second week, Apple is producing testimony intended to prove that the South Korean company copied patented technology for smartphones and tablet computers.
"There are a number of Samsung phones and two Samsung tablets that are substantially the same as those" described by Apple patents, Peter Bressler, an inventor of 70 design and utility patents, said yesterday before a jury in federal court in San Jose, California.
Bressler, who teaches product design at the University of Pennsylvania, was the latest expert to testify for Apple, laying the groundwork for infringement claims. The Cupertino, California-based company seeks $2.5 billion in damages.
Apple's reliance on Samsung (005930) chips for its best-selling phones and tablets will be worth as much as $7.5 billion to Samsung this year, a 60 percent jump from 2011, Gartner Inc. estimates. Because Apple would struggle to find an alternate supplier for the main processor in its mobile devices, the computer maker can't quit buying from its competitor anytime soon, whatever the trial's outcome.
'Ugly Divorce'
"As much as these companies go head to head, there's a definite intertwining there that makes it a real ugly divorce if it were to take place," said Len Jelinek, an analyst at market researcher IHS Inc. "Apple cannot, under any circumstances, be caught in a capacity-crunch situation."
Apple's spending has helped arm Samsung with resources to fuel a surging mobile-phone business that's now the global leader. At a time when there are few other manufacturers able to reliably produce the millions of key chips Apple needs each quarter, switching to an unproven partner could result in parts shortages that might help Samsung grab even more market share. Samsung, meanwhile, would risk losing the business of its biggest customer if Apple were to move elsewhere.
The two companies on July 30 began a jury trial in federal court in San Jose to try Apple's claims that Samsung copied its iPad and iPhone designs and Samsung's counterclaims that it is the victim of patent infringement by Apple. The companies also have sued each other in the U.K., Australia and South Korea, among other countries, in a bid for dominance of a mobile-phone market that Bloomberg Industries estimated at $320.4 billion last year.
Samsung Ties
Apple accounts for 8.8 percent of Samsung's revenue, making it the company's largest customer, according to a Bloomberg supply-chain analysis. The next biggest is Hewlett-Packard Co., providing 3.2 percent.
Samsung and Apple's interdependence traces its roots to the beginning of the iPhone. Ahead of the 2007 debut, Apple realized it needed a processor better tailored to the device. A microprocessor acts as the brains of a device, determining how fast it runs and letting it perform critical tasks. Apple turned to Samsung, then ramping up a division that makes so-called logic chips, which handle the devices' other functions.
The two companies, which had already worked together in screens and memory chips, cut a deal that resulted in Samsung becoming the sole manufacturer of the so-called A-series of chips, which are at the heart of the iPhone and iPad.
Together, those products generated $67.4 billion in sales for Apple in the latest fiscal year. The company may spend about $2.1 billion on A-series chips this year alone, according to Gartner. About 20 percent of Apple's iPhone is comprised of Samsung technology, the Suwon, South Korea-based company said at the trial last week.
Scant Alternatives
Other chipmakers would probably welcome Apple's business. Taiwan Semiconductor Manufacturing Co., the largest maker of chips to order, said last month that it was open to devoting one or more factories to a single customer. The statement was aimed at Apple or Qualcomm Inc., another maker of mobile chips, according to Sam Wang, an analyst at Gartner.
Still, switching to another foundry such as TSMC would bring challenges. TSMC would have to limit orders from other customers to accommodate Apple's needs, and it uses a different production technology than Samsung, requiring a redesign of the processors from the ground up, Wang said. TSMC rival United Microelectronics Corp. (2303) is too small, and Globalfoundries Inc. is too far behind on production technology, he said.
"There's an incredible cost to doing that, and it would be very difficult," said Michael Hasler, a former supply-chain management executive at chipmaker Applied Materials Inc., who now lectures at the University of Texas at Austin. "On the surface it seems like an obvious thing to do, but actually executing it would be very expensive."
SK Hynix
Samsung's dominance of the market for key parts doesn't end with processors. All modern mobile devices use so-called flash- memory chips to store music, video and program files -- features essential to their allure for consumers. Samsung has a third of that market. The company is also the largest maker of liquid crystal displays, with Apple's Retina displays being made in Samsung plants, the South Korean company said in court.
There are signs Apple is taking steps away from Samsung. Some of the memory components in the iPhone 4S, which was released last year, come from SK Hynix Inc., said Stuart Robinson, an analyst who studies the smartphone-component industry for Strategy Analytics. New screen technology that will be part of the next version of the iPhone, to be released this year, is being made by LG Display Co., Sharp Corp. and Japan Display KK, according to Sanford Bernstein & Co. research.
"They are trying to reduce their dependency on Samsung as much as possible," Robinson said.
Buckle Down
What complicates those efforts is that Samsung has contributed technology to Apple's chip designs, according to Jim McGregor, founder of Arizona-based Tirias Research. Shifting to another manufacturer would make Apple vulnerable to more litigation or force it to pay license fees, he said.
Making processors is only becoming more complex, and the designs of the products more intricate, McGregor said. In the past, foundries would gradually introduce new machinery via limited runs on products that only required small volumes. With phone manufacturers' current need for hundreds of millions of chips built on the latest technology, the risk is increasing of a hiccup that might limit output.
Apple can't take that chance. As Samsung, Google, Microsoft Corp. (MSFT) and Nokia Oyj vie for a piece of the smartphone business, "now is not the time to be jumping ship," McGregor said.
"Now is time to be buckling down and making sure you've got a partner that you can work with," he said. "It's only going to get worse going forward."
Line 'Crossed'
The relationship began to fray when Samsung started to release smartphones and tablets that compete with the iPhone and iPad. Samsung, relying on Google's Android software, has become the world's largest smartphone manufacturer, accounting for 33 percent of global shipments in the second quarter, compared with 17 percent for Apple, according to IDC.
That doesn't mean that Samsung holds all the cards. Apple has more than $117 billion in cash and investments, and will use part of that hoard to extend its lead as the biggest purchaser of semiconductors. Apple will increase its orders by 15 percent to almost $28 billion, according to an estimate from IHS. Apple also buys chips from suppliers such as Qualcomm and Broadcom Corp.
The tension between being Samsung's chief buyer and toughest rival isn't lost on Apple Chief Executive Officer Tim Cook.
"We are Samsung's largest customer. And Samsung is a very valued component supplier to us, and I expect the strong relationship will continue," Cook said on a conference call last year. "Separately from this, we felt the mobile- communication division of Samsung had crossed the line. And after trying for some time to work the issue, we decided we needed to rely on the courts."
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