Originally Posted by Dick Applebaum
Think about it!
Say you are Samsung.
You have an internal demand for, say, 100 K A9s per month (0% profit).
You have an external demand for, say, 300 K A9s per month (20% profit).
Apple comes to you with an order for 2 Million A9s per month (15% profit), for 6 months, payable in advance.
do you want to give priority
-- especially since Apple can go to any other Fabs and make the same deal?
There's an old (supplier) saying from the days when IBM dominated the mainframe computer market with 97%:
When you make love with an 800 lb gorilla -- you stop when the Gorilla
Originally Posted by samab
Why should Samsung give priority to Apple --- when Samsung also manufactures smartphones and tablets themselves, which has a higher profit margin because it's a finished product. Selling a million galaxy tab is more profitable to Samsung than selling 10 million custom A5 chip to Apple.
Again, lets assume that you are Samsung -- I am pulling numbers out of the air:
1) You plan to set up a manufacturing line/process for ARM Dual-Core A9
2) You Budget, say, $250 Million to set up and test the line over a period of 3 months.
3) You amortize these costs over, say, a 3-year expected life of the ARM Dual-Core A9
4) Over those 3 years you plan to sell 300 Million units at a profit of $10 per unit -- a very attractive 30% gross profit margin .
5) Just for ease of calculation, the production starts in Jan 2011
Now, using the numbers from my earlier post:
You have an internal
demand for, say, 100 K A9s per month (0% profit). These are the units that Samusing sells to itself for use in Galaxy Tab follow-ons. There is no profit on these chips until they are included in the manufacture of the tablets, and subsequently sold at a profit. But for sake of argument lets say Samsung can sell 100 K Samsung Galaxy Tab2 at full retail, realizing the $10 profit on each ARM Dual-Core A9 included.So, Samsung will make $1 million per month on Samsung chips in Samsung Tablets
You have an external
demand for, say, 300 K A9s per month (@20% profit) or $6.70. Here Samsung sells the chips to others at 2/3 the profit realized by selling to Samsung. There is immediate (30 days later) profit.So, Samsung will make 300 K x $6.70 ~= $2 million per month on Samsung chips sold to others.
Apple comes to you with an order for 2 Million A9s per month (15% profit), for 6 months, payable in advance. Sales of chips to Apple are at 15% margin vs internal 30% margin, or $5 profit per chip.So, Samsung will make 2 million x $5 == $10 Million per month on Samsung chips sold to Apple.
Putting these together:
Samsung will make 100 K x $10.00 == $1 million per month on Samsung chips in Samsung Tablets
Samsung will make 300 K x $06.70 ~= $2 million per month on Samsung chips sold to others.
Samsung will make 2 mill x $05.00 == $10 Million per month on Samsung chips sold to Apple.
There is a thing called the time/value of money
Apple pays Samsung in advance.
Apple guarantees sales for 6 months
Apple reserves certain rights to increase quantities/orders at these prices
Apple, essentially, pays for Samsung to setup the $250 Million manufacturing line/process (the A5 is a superset of the Samsung chip)
Apple can go to another Fab (a Samsung competitor) and make the same offer -- reducing Samsung's economy of scale
A bird in the hand is better than a turd in the bush!
To answer your question:
"Why should Samsung give priority to Apple -- Selling a million galaxy tab is more profitable to Samsung than selling 10 million custom A5 chip to Apple."
If Samsung can make $100 (including $10 on the A9) each and sell 1 million Tabs in 6 months thats $100 million profit ($10 Million on the A9) possible
Samsung can make $5 each and sell 12 million A5s in 6 months that's $60 million profit guaranteed
More profit, Less risk, better use of $ (payment in advance vs manufacturing and inventory costs).