Samsung (NASDAQOTH:SSNLF) might provide some NAND flash memory chips for Apple's (NASDAQ:AAPL) next two iPhones -- presumably called the iPhone 6s and iPhone 6s Plus -- when they launch in September. The Korea Times reports that although negotiations regarding pricing and guaranteed shipments were under way, no formal agreement had been signed yet.
If that deal occurs, it could deal a major blow to Toshiba, SK Hynix, and SanDisk (UNKNOWN:SNDK.DL), the top three suppliers of flash memory chips for the current iPhone 6 models. Toshiba supplies 50% of those chips, SK Hynix handles 30%, and Sandisk provides 20%.
Why is Apple teaming up with Samsung?
Although Apple and Samsung are fierce rivals in the smartphone market, the former is also the latter's top customer for components like application processors. Between 2010 and 2013, Samsung's annual component sales to Apple more than doubled from $6 billion to $13 billion, according to Morgan Stanley estimates.
After patent litigation battles erupted between the two companies, Apple tried to decrease its dependence on Samsung chips by offering to buy a stake in TSMC (NYSE:TSM), the largest independent chip foundry in the world, in 2011. However, TSMC refused Apple's offer, stating that it preferred to maintain its independence.
Last August, Apple and Samsung decided to drop their non-U.S. patent lawsuits against each other, and their relationship warmed up again. Apple realized that no other manufacturer knew its components as well as Samsung, and Samsung needed Apple's orders to support its device solutions (DS) business, which accounted for 36% of its top line last quarter.
That's why Samsung set aside a team of about 200 employees to develop screens for Apple's iPads and MacBooks in April, and plans to manufacture most of Apple's upcoming A9 application processors for its next-generation iPhones. Samsung also manufactured the application processor for the Apple Watch.
A return to flash memory
Samsung previously manufactured flash memory and RAM chips for Apple's iPhone 4 and 4S alongside other suppliers. However, Apple completely stopped using Samsung flash and RAM chips with the iPhone 5 in 2012, presumably due to the escalating competition, legal battles, and price disagreements between the two companies. The following year, Apple stopped ordering other key components, like application processors and batteries, from Samsung.
In Samsung's place, SK Hynix and Elpida provided the RAM for iPhones. Toshiba, SK Hynix, and SanDisk started selling Apple the flash memory. Although handing orders to Samsung doesn't mean that Apple will completely drop those three suppliers, all three companies could see a big dip in orders.
Assessing the damage
SanDisk could be hit particularly hard. The company generates about a fifth of its revenue from Apple orders for flash memory for iPhones, iPads, and Macs. Back in April, SanDisk forecast its first full-year sales decline in three years, blaming lower memory prices, product delays, and the ongoing loss of unnamed "key customers." One customer was likely Apple, which started ditching SanDisk's flash drives for Samsung's in Macs back in 2013. Therefore, the idea of SanDisk also losing its place in the iPhone to Samsung can't sit well with investors.
South Korean supplier SK Hynix counts Apple as one of its top three customers, but it's unclear exactly how much revenue actually comes from Apple's orders for memory (DRAM) and flash (NAND) chips, which respectively accounted for 75% and 25% of its top line last quarter. However, SK's annual sales have risen 68.5% between 2012 (the year Apple started bumping up its orders) and 2014 -- so Samsung's return to the iPhone might throttle that growth.
As for Toshiba, revenue at its memory solutions business soared 56% annually last fiscal year and accounted for 13% of the company's top line. Macquarie analyst Damian Thong estimated that at certain times throughout the year, the percentage of flash chips that Apple buys from Toshiba could actually be as high as 70%. Therefore, Samsung's return could also take a bite out of Toshiba's top line growth.
The road ahead
Sean Yang, assistant VP of DRAMeXchange, forecasts that the global supply of NAND flash memory "will exceed demand throughout the first half of the year," resulting in lower market prices. Yet Yang expects Apple's next-gen iPhones to boost demand and prices in the second half of the year, and that "the situation will get better for manufacturers." However, if Samsung and Apple forge a new deal to supply NAND flash memory, the situation will likely get much worse for suppliers like SanDisk, SK Hynix, and Toshiba in the second half.