Samsung’s Stake in Sharp: Sharp Move – Apple Inc. (AAPL)

Samsung (NASDAQOTH: SSNLF) recently secured a small stake in Sharp in order to have constant and stable access to display panels. Sharp supplies LCD display panels to leading smart phone and tablet developers such as Apple Inc. (NASDAQ:AAPL) and Samsung. Apple now faces a serious threat, as it sources nearly 30% of display panels from Sharp. This may lead to Apple losing control over its supply chain, thus jeopardizing its profit margins in the long run. Apple is making a conscious effort to widen its supplier base and move away from Samsung in order to reduce dependence on its fiercest rival in the smartphone and tablet space. Nonetheless, this strategic move by Samsung has left Apple thinking, thus it is imperative for potential investors to comprehend the impact of this move on Apple Inc. (NASDAQ:AAPL).

Impact on Apple

The recent investment in Sharp by Samsung can pose a serious threat to Apple in the long run. Apple is considering to trim down its dependence on Samsung for supplies, as Samsung is also one its prime competitors. However, Samsung’s investment (3% stake) in Sharp that also supplies display panels to Apple, will force Apple Inc. (NASDAQ:AAPL) to re-think the entire supply chain strategy.

Apple Inc. (NASDAQ:AAPL)

Samsung’s stake in Sharp will enable it a stable access to display panels. Apple, being the largest player in the industry controls a tight ship over its suppliers; however, having to struggle with Samsung over production capacity and volume will relinquish its hold. As the smartphone industry grows and diversifies with new entrants, existing players will strive hard to diversify the supply chain to sustain competitive advantage. Samsung’s growing smartphone business and the recently announced backward integration will force Apple to re-strategize in order to avoid losing further control over its vendors. A 3% stake is not very threatening; however, it now pushes Apple Inc. (NASDAQ:AAPL) to think out of the box to establish new supply chain partnerships for a steady and reliable access of display panels.

More Pressure on Apple

It is imperative to highlight the long-term impact of this move. Apple is already considering diversifying its supply chain as, Samsung is gaining huge momentum in the smartphone space. Samsung, also being a supplier to Apple Inc. (NASDAQ:AAPL) will always favor to keep its own factories loaded in case of a shortage. Apple in the past pressured several suppliers by investing in production to control the cost structure, nonetheless such a strategy could never work with a massive player like Samsung. Smaller suppliers such as Sharp could always be manipulated by Apple to insure stable supplies at a low cost; however, with Samsung buying a stake in Sharp has once again restrained Apple from a diversified supplier base.

Over the years, Apple always had a competitive edge over its peers and consistently maintained high margins through massive bargaining power. With Samsung’s aggressive play in the smart phone market and several new entrants now may not allow Apple Inc. (NASDAQ:AAPL) to enforce such power on its suppliers like before. This will eventually lead to shrinking margins for many of its product categories going forward.

Potential Impact on the Stock Price

In 2012, Apple consciously made a move to diversify its supplier base due to Samsung’s rapid growth in the smartphone market. It was evident to the iPhone maker that in a scenario of supply shortage, Apple could be left wanting with Samsung first fulfilling its own requirements. The ongoing patent dispute between the two giants already provides enough incentive to Samsung to cut Apple from the source. It is noteworthy; Samsung is an exclusive provider of microprocessors needed to assemble iPhone and iPads. The microprocessors contribute more than 25% to the total manufacturing cost for both iPhone and iPads. Hence diversification in the supplier base will allow Apple to hedge the supply risk and continue to enjoy high margins.

With the growing smart phone and tablet market, it will be imperative for all players to have a wider supplier base in order to satisfy demand. The impact on the stock price could be realized by Apple, if going forward Samsung’s stake in Sharp results in shrinking margin for the iPhone. Apple currently enjoys a healthy 53% gross margin on iPhone. With the iPhone being the driving force behind Apple Inc. (NASDAQ:AAPL)’s success, if the margins were to fall below 50% then there could be a heavy downside in the stock price.

The article Samsung’s Stake in Sharp: Sharp Move originally appeared on Fool.com and is written by Ashit Gulati.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!