When teardown firms managed to analyze the components of the iPhone, they found that Apple Inc. had taken the wireless handset industry’s diversification strategy one step further.
Where most handset vendors rely on one main source for certain key components-while cueing up a second source for reliability and a quick ramp, should sales take off-Apple had relied on four sources for its touchscreen display, including Epson, Sharp, Toshiba and Matsushita, according to teardown and component specialist iSuppli Corp.
“I doubt if anyone is going with a single supplier anymore,” said Vinita Jakhanwal, display analyst at iSuppli.
Apple’s strategy is to put its display business up for bid each time it readies a factory order, Jakhanwal said. By pitting suppliers against each other, Apple maintains the upper hand and keeps its costs low, according to the analyst.
Covering bases
Officially, Apple does not comment on its component strategy or its suppliers and the latter typically are bound by non-disclosure agreements from marketing or even acknowledging their relationship with original equipment manufacturers, according to Apple’s public comments and analysts.
But the iPhone example illustrates that handset vendors have taken steps to protect their supply of critical components, while suppliers take substantial risks to win business with marquee customers such as Apple, which lends credence to their technology choices, product quality and ability to deliver, presumably leading to business growth.
“This strategy does open suppliers to fluctuations in the market,” Jakhanwal said. “That’s the name of the game now. It’s been a buyers’ market for some time. If a supplier loses a key contract, they simply have to go after business with another OEM to survive.”
Diversifying defense
Another angle for suppliers: those that play in both the wireless industry and other consumer electronics segments can weather downturns in one sector by focusing on the other. According to Jakhanwal, Sharp-one of Apple’s iPhone suppliers for displays-also plays in consumer electronics and its recent record of straight line growth reflects its diverse product offerings.
In contrast, Samsung SDI, another mobile display manufacturer and a subsidiary of the global Samsung conglomerate, has posted only modest growth in the second quarter compared with the first quarter. The display maker serves both Nokia Corp. and Motorola Inc. and its slowing fortunes are a reflection of Motorola’s recent downturn in shipments, Jakhanwal said.
Chip challenges
Displays are important to a handset’s functionality and user experience and they are expensive-generally, they are the second most expensive item in a handset’s bill of materials. But the most expensive items in a handset are the chipsets that enable its radios, power management and applications processing. And in that case, handset vendors tend to settle on one key supplier because the chips are more difficult to swap out, at least in the short term, according to Will Strauss, analyst at Forward Concepts. One reason: regulatory approvals take time and a handset with a new chip would have to pass muster anew.
Yet even in that scenario, handset vendors have been taking steps to diversify suppliers as well, the analyst said. And chip makers have scrambled to ensure that they replace one account with another, due to the more direct line between a handset vendor’s fortunes and those of its chip suppliers.
“When Nokia coughs, Texas Instruments gets a cold,” said Strauss. “The same thing happens with Motorola and Freescale.”
Both Nokia and Motorola have announced this year that they will seek to expand their choices of main chip suppliers. Nokia has said it will do more volume-based chip business with Infineon Technologies, giving TI the willies, while Motorola has said it will work more with Qualcomm when its agreement with Freescale runs out, Strauss said.
Breathing room
Because the top handset OEMs control a large proportion of the world market, however, diversification has its limits.
“If suppliers were tightly aligned with a particular handset manufacturer, they are making moves to diversify,” said Francis Sideco, analyst at iSuppli. “Keep in mind that there are not a lot of customers to diversify with.”
“I wouldn’t really call that diversification,” clarified Tina Teng, handset analyst at iSuppli. “Component providers want to get as much business as they can starting with one or two OEMs. Working with more OEMs doesn’t really mean diversification for the sake of risk management.”
Diversification of suppliers for the handset OEMs only goes so far as well, Strauss said.
While many vendors offer GSM baseband and transceiver chips, which enable some component swapping, the fact that few vendors offer W-CDMA chips makes switching 3G suppliers much harder, according to Strauss.
Another aspect of the chip business compounds that effect, according to the analyst. In the Nokia-Texas Instruments and Motorola-Freescale cases, the chip vendors employ patented, licensed software from the handset vendors in order to make their chips operational. Both TI and Freescale therefore are exploring the development of their own 3G chips independent of their favored customers and the latters’ proprietary software in order to diversify their own customer base, the chip
analyst said.
That effort, however, will strain the chip vendors’ resources, according to Strauss.
“It’s tough,” Strauss said. “That requires hundreds of millions of dollars in investments and two to three years’ time. The handset vendors and chip vendors symbiotic relationship sometimes resembles a straightjacket-because, often, the baseband and transceiver chips are irreplaceable.”
One upshot: Sharing a straightjacket can be a cozy scenario indeed, so long as neither party struggles too much.
