Apple pays Samsung estimated $950M for missing OLED purchase targets

Posted:
in iPhone edited July 2020
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
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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

  • Reply 1 of 17
    wonkothesanewonkothesane Posts: 1,729member
    Just to put this into perspective: Samsung Display earns between 4 and 8 B every quarter over the last three years.

    Apple OTOH books some 10-20 B net income per quarter. 




    jony0MacProwatto_cobra
  • Reply 2 of 17
    netroxnetrox Posts: 1,436member
    I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized. 


    ronnjony0Beatswatto_cobra
  • Reply 3 of 17
    Analysts don't know for sure Apple has paid this much, do they?  I hope they're not just guessing this figure.
    Beatswatto_cobra
  • Reply 4 of 17
    netrox said:
    I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized.

    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.
    ronnFileMakerFellerdesignrelijahgwatto_cobra
  • Reply 5 of 17
    MplsPMplsP Posts: 3,955member
    netrox said:
    I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized. 


    Perhaps - but if the price of buying the screens exceeded the penalty, maybe not. theoretically, the penalty would be enough to cover Samsung's profit loss on that volume. Also, what does Apple do with the screens? If they've already accounted for expected future production and repairs like @blurpbleepbloop stated, they would end up with a bunch of surplus. Screens typically aren't interchangeable between iPhone models, either, so they would likely end up as e-waste.
    ronnwatto_cobra
  • Reply 6 of 17
    lkrupplkrupp Posts: 10,557member
    Analysts don't know for sure Apple has paid this much, do they?  I hope they're not just guessing this figure.
    They are inferring the payment based on Samsung's earnings guidance. In other words they pulled it out of their asses. Once again the AI headline is misleading at best. "Apple MAY have paid Samsung..." would have been more appropriate.
    BeatsFileMakerFellerrevenantSpamSandwichwatto_cobra
  • Reply 7 of 17
    In addition, this may not necessarily mean the money has been “lost” by Apple. The penalty payment discussed in the article might be considered in future contracts with Samsung.
    watto_cobra
  • Reply 8 of 17
    BeatsBeats Posts: 3,073member
    Is there actual proof?

    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.
    aderutterwatto_cobra
  • Reply 9 of 17
    Rayz2016Rayz2016 Posts: 6,957member
    netrox said:
    I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized. 


    They will get penalised because Samsung will have spent millions on materials to build the screens. They probably can’t sell them on because no one else can afford them or needs them. 
     Apple won’t want them because they’d need to store them, and if they might decide to go for a better screen next year, in which case how would they unload them? 

     Sounds unfair, but it’s not. It may surprise you to learn that there is probably a clause in the contract that means Samsung would have to pay millions in penalty fees if they wanted to deliver the screens earlier than planned. 

     I used to develop supply chain software, and yes, companies will fine suppliers who deliver before they’re ready for it.
    edited July 2020 designrrevenantwatto_cobra
  • Reply 10 of 17
    It may not be a penalty technically.  Apple probably negotiated a price per unit based on the quantity they intend to buy.  When Apple updated Samsung that they actually intend to buy less that may have increased the price per unit of the parts they already took delivery on.  So it’s sort of finishing paying for the orders they received.

    watto_cobra
  • Reply 11 of 17
    This stuff drives me nuts! These are not facts, they are simply speculations.
    SpamSandwichwatto_cobra
  • Reply 12 of 17
    9secondkox29secondkox2 Posts: 2,768member
    Beats said:
    Is there actual proof?

    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.
    Apple designs their own processors and sends out for fab. Their are really only two partners they trust to do it. 

    They should probably purchase tsmc and own it. But I don’t think they want to get into the fab game. 

    It’s a little different with displays. Their are more options. But only a few truly quality partners. 

    Apple could purchase a factory, but then they’d also need to stay ahead on display innovations - something nearly impossible unless your doing all kinds of display stuff. I don’t know if they want to get into that outside of owning and operating the factory as a supplier for others as well. And that’s not something in Apples DNA. 
    watto_cobra
  • Reply 13 of 17
    EsquireCatsEsquireCats Posts: 1,268member
    Highly doubt that figure, at an estimated cost of $66 per panel at the top end, this would be a minimum shortfall of 14M iphones: large enough to warrant an earnings revision.
    watto_cobra
  • Reply 14 of 17
    revenantrevenant Posts: 621member
    Just to put this into perspective: Samsung Display earns between 4 and 8 B every quarter over the last three years.

    Apple OTOH books some 10-20 B net income per quarter. 


    your perspective is a little flawed. you are comparing apples to oranges. Samsung display is not the same as apple inc. you are comparing apple as a whole compared to samsung in one segment. Samsung has many, many, many branches with which it pulls in money. apple does not have a display arm with which it sells and makes profit from.
    muthuk_vanalingamwatto_cobra
  • Reply 15 of 17
    Beats said:
    Is there actual proof?

    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.
    Just a ripoff Apple company who slanders Apple? Please. Look at the iPhone 5, look at the Samsung Galaxy and then look at the iPhone 11. ESPECIALLY when you consider the latest iOS, Apple has spent the last 6 years giving their smartphones the same look and feel as the Samsung Galaxy line. It is true of iPads too. The iPad Pro is VERY SIMILAR to Samsung's previously existing Galaxy Tab Pro line. 

    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.
    edited July 2020 elijahgh4y3sgatorguy
  • Reply 16 of 17
    Rayz2016Rayz2016 Posts: 6,957member
    Beats said:
    Is there actual proof?

    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.
    Just a 
    And that’s where I stopped reading. 
    edited July 2020 LeoMCrevenantwatto_cobra
  • Reply 17 of 17
    dewmedewme Posts: 5,415member
    Big businesses like Apple and Samsung deal in big numbers all of the time. These types of business transactions between producers and suppliers are very common, nontrivial, and always involve risks on both sides. The numbers are carefully negotiated and the risks are factored into the financial plans of both parties. Nobody at this level in a thriving business assumes the happy path will always define the outcome and are always prepared to enact contingency plans, like activation of penalty clauses.

    I personally wouldn’t read too much into this, especially in light of the current business and social climate. Of course the speculators and story tellers are going to probe and dig around anything that vaguely resembles a chink in Apple’s or Samsung’s armor looking for a juicy story. That’s just their job. No big deal. 
    watto_cobra
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