Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF), the two largest smartphone makers in the world, usually aren't considered allies. Nonetheless, the two companies share a symbiotic relationship that is nearly impossible to break. Apple is Samsung's largest customer for components, so a breakup would leave the former without critical components and the latter with a big hole in its top line.
That's why the two tech giants dropped their non-U.S. patent lawsuits against each other last August. Samsung also established a dedicated team of roughly 200 employees to develop screens for Apple's iPads and MacBooks, and will manufacture most of Apple's upcoming A9 chips for its next-generation devices. A recent teardown by iFixit and Chipworks also revealed that the Apple Watch's application processor was made by Samsung's 28-nanometer process.
Let's look at the Apple/Samsung relationship and then discuss what this tighter relationship between the two tech giants might mean for other major Apple suppliers such as TSMC (NYSE:TSM) and SanDisk (UNKNOWN:SNDK.DL).
Why Apple and Samsung need each other
Between 2010 and 2013, Samsung's annual component sales to Apple rose from $6 billion to an estimated $13 billion, according to Morgan Stanley. This means Apple orders likely accounted for a significant chunk of Samsung's revenue of $188 billion last year.
Samsung, Intel (NASDAQ:INTC), TSMC, and GlobalFoundries are the only four foundries in the world that can manufacture top-tier 14nm chips like Apple's upcoming A9 processors. Samsung reportedly manufactured 40% of Apple's 20nm A8 chips for the iPhone 6 and 6 Plus, with TSMC making the rest. With the new A9 chips, Samsung is expected to provide the majority, with GlobalFoundries manufacturing the rest.
This is good news for Samsung as it needs component sales to offset losses at its mobile division, which is losing market share to low-margin rivals including Xiaomi, Lenovo, and Huawei. Revenue at that unit, which accounts for over half of the company's top line, fell 21% annually last year.
For Apple, the upside of strengthening its relationship with Samsung is that it doesn't have to keep jumping between suppliers. Back when Apple and Samsung were still suing each other across the globe, Apple had even offered to buy a stake in TSMC to reduce its dependence on Samsung. TSMC refused, stating it preferred to maintain its flexibility and independence, and now it faces the loss of Apple business.
What this means for TSMC vs. Samsung
Samsung's tighter relationship with Apple means TSMC could be cut out of the loop in future iOS devices, even as Samsung ramps up.
Last quarter, Samsung's device solutions business -- which manufactures components like semiconductors and memory -- posted a 10% annual increase in revenue as operating income surged 81%.
Samsung also recently budgeted $14 billion for new plants and equipment to strengthen its device solutions business. To boost its mobile margins and decrease its dependence on other chipmakers, Samsung also replaced Qualcomm's (NASDAQ:QCOM) Snapdragon chip with its own Exynos processor in its latest S6 flagship devices. These moves indicate that Samsung plans to expand its chipmaking business to challenge Qualcomm's mobile chips and TSMC's foundry business.
While TSMC's revenue rose 50% year-over-year last quarter as net income rose 65%, a large portion of that gain came from orders of Apple's A8 chips -- a major revenue stream which it will lose to Samsung and GlobalFoundries with the upcoming A9s. In February, analysts cited by Taipei Times estimated that the percentage of TSMC's annual revenue from Apple would rise from 6.5% last year to 9.6% this year as iPhone 6 sales chug along. But when Apple switches over to the A9s with next-gen iPhones and iPads, TSMC could see a 10% decline in its annual revenue.
TSMC recently reduced its annual capital expenditure target by a billion dollars to a range between $10.5 billion and $11 billion. However, it stated that it wouldn't affect current its production capacity, since Apple remains a top customer.Yet TSMC's reduction in capex as Samsung increases its own indicates that the two businesses could soon be headed in opposite directions.
Bad news for SanDisk and other suppliers
A closer relationship between Apple and Samsung will also hurt data storage solutions company SanDisk. Apple's orders usually account for nearly a fifth of SanDisk's revenue, according to data compiled by Bloomberg.
In April, SanDisk forecast its first full-year decline in three years, blaming lower prices, product delays, and the loss of key customers. One of those customers was likely Apple, which installed Samsung flash drives in its newer Mac models. If Apple places more of Samsung's data storage solutions in its products, SanDisk could end up with a big hole in its top line.
SanDisk isn't the only company to face this predicament. Apple is also one of the top three clients for Micron Technology, SK Hynix, AU Optronics, TSMC, and Qualcomm. Since these companies all compete directly against Samsung's components business, stronger Apple-Samsung collaboration could adversely impact their revenue.
The main takeaway
A closer relationship between Apple and Samsung benefits both companies but hurts top-heavy supply chain players such as SanDisk. In this vein, investors should be careful when investing in supply chain companies that are too dependent on single market-leading customers such as Apple.