Samsung planning US$9b down payment on iPhone displays

[SEOUL] After years of battling Apple Inc in courtrooms and retail stores, Samsung Electronics Co may be ready to reconcile for its greater good. That olive branch is expected to cost the Korean company almost US$9 billion upfront.

Samsung is in talks with Apple to be the exclusive supplier of displays for iPhone models scheduled for release next year, according to people with direct knowledge of the matter. The company would need to spend the money building capacity for the technology, which is thinner, brighter and less draining on the battery than those in most current smartphones.

The potential deal to supply Apple with OLED screens - first reported by the Maeil Business Newspaper - may help Samsung reverse two years of dwindling smartphone market share, revenue and net income. The consumer-electronics giant in January warned of a gloomy 2016, so locking in Apple may attract Chinese smartphone vendors wanting to upgrade their devices to stay competitive.

"It looks like a huge investment risk for Samsung at first, but it will pay off handsomely," said Greg Roh, an analyst at HMC Investment Securities in Seoul. "Once Apple adopts the new display, others can't help but follow."

Subsidiary Samsung Display may spend at least 10 trillion won (S$11.8 billion) beefing up OLED capacity, the Maeil reported, citing sources it didn't identify. Apple sold more than 231 million iPhones last year, and Samsung Display made about 3 million screens a month. Just to keep pace, Samsung would have to boost production by a factor of at least six.

Samsung Electronics owns 85 per cent of Samsung Display as part of an intricate web of cross-shareholdings in the conglomerate. Samsung Display, based in Yongin, declined to comment in an e-mail.

An Apple spokeswoman in South Korea didn't respond to a request for comment.

Samsung Electronics will report audited first-quarter results on Thursday, including net income and divisional performances. Analysts estimate profit of 4.42 trillion won, or a 2 per cent decline from a year earlier, according to data compiled by Bloomberg.

Shares of Samsung rose 0.2 per cent to 1,299,000 won as of 10:37 am in Seoul. The stock has risen 3.1 per cent this year after posting three straight annual declines.

Samsung posted better-than-expected preliminary operating profit of 6.6 trillion won on April 7 after releasing its Galaxy S7 phones about a month earlier than usual to capitalize on the lull in new Apple products. First-quarter sales of 49 trillion won slightly exceeded analyst estimates.

In the past four weeks, eight analysts raised their estimates by an average of 281.1 billion won.

"It's great news for Samsung," Chung Won Suk, a Seoul-based analyst at HI Investment & Securities Co, said of the potential Apple supply deal. "Samsung will exclusively get the initial orders from Apple in late 2017 for the flagship lines, and it will get the price premium."

Making a multibillion-dollar commitment to Apple hasn't always worked out for suppliers. In 2014, GT Advanced Technologies Inc filed for bankruptcy after it couldn't produce sapphire screens of usable quality for iPhones. Filings by GT Advanced called the terms of its deal with Apple "onerous."

Samsung Vice Chairman Lee Jae Yong is trying to accelerate a diversification beyond phones, which depend on Google's Android operating system and compete with hundreds of Chinese makers, including Huawei Technologies Co, Xiaomi Corp and Lenovo Group Ltd.

The mobile division generated 103.6 trillion won in sales last year - or 52 per cent of Samsung's total, the company said.

Global smartphone sales are expected to increase by just 7 per cent this year, the slowest rate in the product's history, according to Gartner Inc. About 150 million users in Asia will delay upgrading in the next three years while they wait for prices to come down, the researcher said.

Sales of another key product for Samsung - TVs - declined 0.3 per cent last year and are only expected to grow by 3 per cent this year, helped by the Summer Olympics in Rio de Janeiro. The sluggish growth is affecting Samsung shares, which have declined about 7 per cent during the past 12 months.

During the same period, Apple shares plunged 21 per cent. Sales will fall for a second straight quarter, a forecast that missed analyst estimates, as growth stalls in the smartphone market, the company said Tuesday. The lower-cost iPhone SE released in March targeted new customers in emerging markets such as China and India.

Samsung gets about 4.8 per cent of its 200.7 trillion won in revenue from supplying Apple, according to data compiled by Bloomberg. At least three Samsung Group companies provide the Cupertino, California-based company with displays, memory chips and batteries.

Sales of OLED displays should almost double to 21.5 trillion won next year from 11.2 trillion won last year, Peter Yu, a Seoul-based analyst at BNP Paribas SA, said in an April 15 report. Top-of-the-line Galaxy smartphones also should start using the displays next year, Mr Yu wrote in raising his price target on the stock.

Samsung was one of the biggest makers of chips and displays for Apple until the companies started suing each other in 2011 for alleged patent infringements. Samsung invested in a flash-memory factory after Apple said it wanted to switch from hard-disk drives in its iPods. Yet that relationship progressively soured, and Apple depended on alternative suppliers, including LG Display Co, Sharp Corp and Japan Display Inc.

Those rivals have come to depend on work for Apple and in each case are its biggest customer. Apple generates 42 per cent of Japan Display's sales, 31 per cent of LG Display's and 20 per cent of Sharp's, according to data compiled by Bloomberg.

In 2014, Apple and Samsung dropped all lawsuits against each other outside the US, with Samsung agreeing in December to pay US$548 million. And, last year, Samsung created a standalone team of about 200 employees working exclusively on Apple products, people familiar with the matter have said.

"When Apple starts adopting the new screens for its iPhones from 2017, that will be the trigger to change the whole smartphone industry landscape to OLEDs," said Park Ki-Bum, a Seoul-based analyst at BNK Securities Co.

"If the world's two biggest smartphone makers are leading the technical changes, it is almost certain that Chinese brands will follow their path."

BLOOMBERG