Apple pays Samsung estimated $950M for missing OLED purchase targets
Apple may have paid Samsung Display in the region of $950 million, analysts believe, a hefty penalty paid out for not buying enough OLED panels to meet a contracted minimum amount.
iPhone 11 Pro
As with many firms in the iPhone supply chain, Apple has agreements to make a minimum purchase of specific goods or services, typically to achieve a specific price per unit that both companies are happy to work with. In cases of lower-than-expected demand, changes in orders could mean Apple misses purchase targets for components, which in turn leads to financial penalties.
Citing a report from TheElec in early July, analysts at DSCC highlighted an element of Samsung's earnings guidance for the second quarter of 2020, namely an element where Apple was making a one-time payment to Samsung Display. While the revenue guidance was down 7% year-on-year at KRW 52 trillion ($46 billion), the high operating profit guidance of KRW 8.1 trillion ($6.6 billion) was up 23%, and far higher than analyst expectations at the mid-6 trillion won level.
It was reported that the one-time payment from Apple added to the operating profit, but a figure wasn't given for the value. Initial reports put Apple at making a payment in the region of KRW 900 billion ($749.7 million), caused from purchasing too few OLED panels than contracted.
According to sources of DSCC, Apple's payment was at a far higher level, believed to be closer to $950 million. In effect, the Apple payment is thought to have turned what would have been an operating loss for Samsung's display business into an operating profit.
There is no explanation for the shortfall, and while it is likely due to a combination of factors, the most likely culprit would be COVID-19, with the global pandemic affecting the vast majority of Apple's supply chain, as well as demand for its products. In June, Gartner claimed shipments for the iPhone slumped in the first quarter by 8.2% year-on-year.
This is not the first time Apple has paid Samsung for missing purchasing targets. In 2019, Samsung was thought to have received an estimated $683 million from Apple for similar reasons.
iPhone 11 Pro
As with many firms in the iPhone supply chain, Apple has agreements to make a minimum purchase of specific goods or services, typically to achieve a specific price per unit that both companies are happy to work with. In cases of lower-than-expected demand, changes in orders could mean Apple misses purchase targets for components, which in turn leads to financial penalties.
Citing a report from TheElec in early July, analysts at DSCC highlighted an element of Samsung's earnings guidance for the second quarter of 2020, namely an element where Apple was making a one-time payment to Samsung Display. While the revenue guidance was down 7% year-on-year at KRW 52 trillion ($46 billion), the high operating profit guidance of KRW 8.1 trillion ($6.6 billion) was up 23%, and far higher than analyst expectations at the mid-6 trillion won level.
It was reported that the one-time payment from Apple added to the operating profit, but a figure wasn't given for the value. Initial reports put Apple at making a payment in the region of KRW 900 billion ($749.7 million), caused from purchasing too few OLED panels than contracted.
According to sources of DSCC, Apple's payment was at a far higher level, believed to be closer to $950 million. In effect, the Apple payment is thought to have turned what would have been an operating loss for Samsung's display business into an operating profit.
There is no explanation for the shortfall, and while it is likely due to a combination of factors, the most likely culprit would be COVID-19, with the global pandemic affecting the vast majority of Apple's supply chain, as well as demand for its products. In June, Gartner claimed shipments for the iPhone slumped in the first quarter by 8.2% year-on-year.
This is not the first time Apple has paid Samsung for missing purchasing targets. In 2019, Samsung was thought to have received an estimated $683 million from Apple for similar reasons.
Comments
Apple OTOH books some 10-20 B net income per quarter.
When talking about serious volume orders companies universally negotiate a price at a given volume. The better the volume, often a better price can be achieved from a vendor. A guarantee to buy/sell a certain minimum allows a vendor to ensure that a contract to sell will meet their baseline opportunity cost as well as ensuring any hard cost they will have as a result of preparing large orders will be covered.
Vendors have to have a ‘penalty’ if their buyers fail to meet their minimum purchases otherwise they can be left holding the bag for unused components and other sunk costs made because of the purchase agreement.
In Apple’s case, I’m sure they had already accounted for all the screen they might need for repairs. They have a lot of data telling them how many they’ll likely need for any number of units sold.
I wish display production was cheaper then Apple could open a plant themselves. Samsung Display is a good company but you know their money goes to Samsung Mobile when they need it which is just a ripoff Apple company who slanders Apple.
And if you call advertising for the purposes of competition "slander" you can't be helped. Especially since pretty much everything that Samsung said about Apple in those infamous commercials were acknowledged by Apple in the following years by Apple's changing their phones to be carbon copies of Samsung phones. If anyone was committing "slander" it was Tim Cook, who during the "switch to iPhone" promotion (which basically went nowhere and has since been abandoned) was engaging in maximum FUD scare tactics about "security" and "privacy" ... only to find out that most of the same issues that he accused Android of were also present on iOS thanks to apps, and that Apple wasn't doing a thing about it.
And the ultimate "slander" of all was Apple's trashing kids who use Chromebooks, which was just sour grapes over Apple's limitations in software making them unable to come up with cloud-based device management tools that public schools - who at the individual school level (not the "school district office" level) does not have the resources or expertise to staff private sector caliber IT departments - need, and oh yeah seems to be unable to come up with keyboard/trackpad solutions that don't cost more than an entire Chromebook itself. And why Microsoft - who also directs cheap barely functional Windows 10S netbooks towards public schools - was exempt from Apple's rant you have to explain. Oh wait ... you don't. Because Microsoft has less public school market share these days. So it wasn't about what was best for the kids at all. It was just sniping at another company for succeeding in the market place by addressing technological challenges - cost and management and yes if you don't think that cost is a technology issue then you have never worked in technology - that Apple fails to address.
And by the way ... it isn't that display production is cheap. Display production is EXTREMELY HARD. Samsung is the leader in display production and it took them decades of R&D and engineering to get there. They went from NOTHING in that space to #1 and surpassed a lot of other excellent companies along the line. Here is the deal: Samsung is the #1 company in the world in components right now. Doing components is straight physics and low level engineering combined with elite industrial and manufacturing engineering techniques. That has NEVER been Apple's bag. The great things they have done by way of acqui-hiring PA Semiconductor aside, Apple's thing has been taking the components built by others and putting them together to make great products. That's excellent engineering too but of a completely different type. Presuming that Apple would be the best in the world at it when other companies who were at it for decades, couldn't keep up and wound up going bankrupt or scrapping that part of the business in order to survive really paints you as someone who just likes Apple products and could care less about the technology and business aspects behind it.
Let me put it another way ... Apple almost certainly has a 3 nm design for their CPU and other chips ready to go. Why not go ahead and make and release them to blow the competition out of the water? Because ... the only company on the planet capable of building 3 nm chips at present is ... Samsung. TSMC - the company that actually builds Apple's CPU designs - is 12 to 18 months behind Samsung. Samsung has already started producing prototypes and will go into mass production of 3nm chips in 2021. Quite possibly their Exynos 995 CPUs. The Exynos 992 was their first 5 nm chip. It "may" be in the foreign editions of the Samsung Galaxy Note 20. It will definitely be in the foreign Samsung Galaxy S30. Meanwhile TSMC won't be able to give Apple a 3nm Ax chip until 2023. Oh yeah ... Intel will have 3nm capability in 2025. When you consider that their 14 nm Coffee Lake i9 and Xeon chips already outperform Apple's 7nm A13 ... yeah that is why I was telling everyone "hold the phone" on the claims that Apple Silicon was going to crush Intel in performance, because the comparison was Apple's 7 nm chips against Intel's 14nm. When Intel releases their 7 and 5 nm chips over the next few years - they may just skip straight from 10 nm to 5 nm to compete with AMD who has 5 nm chips coming next year - then we will see a real battle.
You know, there is a huge, wide, wonderful tech world out there of which Apple is only a small part of. Learning about it would be a lot of fun.