Now this is an interesting little tale: Samsung has raised the price it charges Apple for the main applications processors in the iPhone and iPad. The interesting question is why have they done this? I have a suspicion that I know the answer why: no proof, just a suspicion.
Samsung Electronics , the world's largest technology firm by revenue, raised the price of mobile processor supplied to Apple Inc. AAPL +0.67% by 20% recently, Chosun Ilbo reported Monday, citing a person familiar with negotiations between the two tech giants.
"Samsung Electronics recently asked Apple for a significant price raise in (the mobile processor known as) application processor," the person was quoted as saying in the report. "Apple first disapproved it, but finding no replacement supplier, it accepted the (increase.)"
There are good reasons to raise the price you charge to a customer: for example, if your input costs have gone up. But that doesn't really apply in semiconductor manufacture. About the only cost that really matters in the production of a silicon chip is the cost of the plant to build it. This is billions upon billions of dollars and once you've actually built it that's a sunk cost. Makes no difference to those costs whether you make one processor or one hundred million. The marginal costs, the costs of making each chip after you've built that plant are somewhere around spit. Your raw material is silicon ingot, itself made from sand. The ingot costs some $40 a kg these days and while I don't know how many chips you can make out of a kilo it's certainly thousands, if not tens of thousands. Similarly very few people are employed in chip manufacturing. The costs are all, or to an acceptable level of accuracy all, fixed costs and no to near no marginal costs.
So there's no such reason for Samsung to increase prices to cover increased input costs. They've already built the plant in Austin TX.
Of course, sometimes you increase prices just because you can. Whoever it is wants more of what you can make and cannot get it elsewhere: you've got them over a barrel so why not gouge them? Often you can do this but you don't: you'd prefer to be long term greedy, not short term. For if your desperate customer realises that you're gouging her then she'll be looking around for another supplier for the future. Possibly even going so far as to encourage the setting up of a competitor to you.
So, what might encourage Samsung to go for the short term greed rather than the long term type? My suspicion is that Samsung is realising that there's no long term relationship available with Apple any more. There is of course the multi-continental fight going on over Android and the design of phones and tablets. But more than that, Apple has been disengaging from Samsung as a flash memory supplier, even as a screens supplier. To the point that there are rumours that Apple has been bailing out a Sharp plant in order to ensure that supply from some, any other than Samsung, company.
There have also been stories around that Apple is looking to either bring inhouse the chip fabrication itself, or to look for another fab house to bake them. Apple already does the detailed design of the chips with ARM providing the basics of the core. In the medium term, over the next generation or two of chips, it wouldn't be all that difficult for Apple to farm it out to someone else, the physical construction of the chips.
Which is where my supposition about Samsung comes in. They've realised this is the direction Apple is going in. They're going to get dumped as a chip supplier sooner or later. So, why not make the most out of Apple while they've still got the contract, while Apple cannot in fact go elsewhere? Be short term greedy because they know there's no long term future in the relationship?
As I say, I've no proof of any of this, it's just a supposition. But it does match what we've been hearing on the grapevine. Apple is detaching itself in some fields from using Samsung as a supplier. There are rumours that it's looking for another chip fabricator. So, why shouldn't Samsung rook Apple on pricing while it still has the chance? That'll be another 20% then thank you Mr. Cook.
