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Report: Apple Inc. Turns to "Frenemy" for Memory Supply

By Ashraf Eassa - Jul 6, 2017 at 10:30AM

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A report from DigiTimes indicates that Apple needs more NAND flash memory than its primary vendors can supply.

According to DigiTimes, which cites "industry sources," Apple (AAPL -0.44%) NAND flash suppliers SK Hynix and Toshiba "have both experienced lower-than-expected yield rates for their 3D NAND technologies, resulting in fewer supplies for Apple's 2017 series of iPhones."

NAND flash is a type of non-volatile memory that is commonly used in modern computing devices, such as smartphones, tablets, and personal computers.

Toshiba memory chips.

Image source: Toshiba.

"The overall supply of NAND flash chips for the upcoming iPhones has fallen short of demand for the devices by as much as 30%," the report continues. 

This sounds bad, right? Well, fortunately, it seems that Apple has a solution.

Partnering with a "frenemy" -- again

Samsung Mobile (NASDAQOTH: SSNLF) is arguably Apple's fiercest competitor. Its Galaxy S and Note lines of premium smartphones compete directly with Apple's iPhone models. 

However, Samsung Mobile is just one (rather important) division of Samsung Electronics. Samsung Electronics is a major vendor of memory products (both NAND flash and DRAM), logic semiconductors, image sensors, and displays. 

Samsung is already believed to be the sole supplier of the OLED display that will be found on Apple's upcoming premium iPhone (though Apple is apparently working to diversify its OLED display supply chain), and now -- per DigiTimes -- Apple is apparently bringing Samsung on as a NAND flash supplier for the coming iPhone models. 

"Apple has turned to Samsung for more NAND chip supplies, since Samsung has relatively stable yield rates for 3D NAND technology and has scaled up its output of 3D NAND chips," DigiTimes reports. 

That's good for Apple and for Samsung

Clearly, Apple leaning on Samsung for 3D NAND flash supply is a win for Samsung as it gets to sell more 3D NAND flash, boosting the revenues and profits of its already booming memory business. 

Apple "wins" because it seemingly avoids a severe component shortfall that could create a substantial production bottleneck for the new iPhone models. Such a bottleneck could stall sales of its next generation iPhone models in the post-launch quarter -- arguably the most important sales period for a given iPhone generation since that's when a given iPhone model is "freshest." 

Tight industrywide supply

Per DigiTimes, the combination of Apple and other vendor's NAND flash needs as they are preparing new devices, as well as "disappointing yield rates" of 3D NAND among "many of the major NAND flash suppliers" is expected to lead to a tight NAND flash supply situation "through the end of 2017." 

These dynamics could make things frustrating for purchasers of NAND flash (e.g. device vendors, solid state drive vendors, and others), but a tight supply situation could be a good thing for the NAND flash vendors. 

In particular, a supply demand balance tilted in the direction of "demand" means that NAND flash vendors can raise their prices to try to reduce demand, bringing the supply/demand equation back into balance. 

In the near term at least, that should help boost the margins that the 3D NAND flash vendors can enjoy.

Now, if demand doesn't change dramatically, but the 3D NAND makers see increased yield rates and/or put in additional 3D NAND capacity to try to capture demand, then that should lead to a reduction in 3D NAND average selling prices and a potential reduction in margins.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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