This post was supposed to be published long back ... lazy me !...anyways
You must have been reading quite a few articles about Apple Vs Samsung patent wars recently. While most of the details are pretty straightforward..Samsung copying the look and display of Apple phones while Apple infringing upon Samsung's patents in wireless communications. Add to that the recent ruling by Californian court in favour of Apple penalising Samsung to minimum USD1.05Bn for violation of patents.
But one detail that caught my eye was that Samsung is also a sole supplier of mobile phone processors that run the latest Apple iPhones and iPads.
If we look at history of patent wars..most of them go for an out of court settlement..and this case was even more suitable for such settlement given the parallel channels of business between the two giants. But both of them decided to slug it out in courtroom..strange !
As a procurement professional I am intrigued by the fact that Samsung decided to legally challenge its key customer of the components business ..one that contributes almost 8% to the total operating profits of Samsung group (pl note Samsung components is one part of Samsung Electronics which in turn is one company in Samsung group)
Am also intrigued by the fact that Apple decided against out of court settlement with its key supplier...one on which it is completely dependent for the critical components like the processor and memory chips.
A true strategic source if you ask me...accounting to almost 26% of its product cost.
What can be the reasons?...have thought of few of them -
1. Samsung's organisation structure - as per certain articles..the division of business in Samsung extends from bottom right upto the top. They have kept matters separate between mobile devices and semiconductors within samsung electronics. So operating decisions in one vertical should not affect another. But then we know that penalty figures of USD 1Bn (which might be tripled by the judge) would make any corporate think about overall relationship with the customer/competitor at the corporate level. The walls between verticals become immaterial. They won't shy away from pulling all strings...including supply disruptions. But then Apple must have anticipated such a move from Samsung
2) Moreover Samsung is one of the major players in semiconductor market...with almost 70% share. And the entry barriers are very high in this capital intensive industry. Am damn sure.. lot of thought and due diligence must have happened during vendor rating and selection for sourcing such a critical component at Apple's end. Once approved the vendor is in for a long haul. Then why did Apple take the risk?
3) That brings us to the supply contract between the two for the processors. While details are not available about that piece of document for obvious reasons..am sure Apple must have inserted some very heavy penalties and consequential damage clauses in the contract making the option of using supply disruption as a bargaining chip very unattractive option for Samsung.
4) One more possibility is that Apple has already initiated a search for an alternate source to switchover from Samsung since they first spoke legal ie around April 2011. Thus the threat of termination of contract might have been playing on the mind of Samsung top execs.
5) This can be corroborated from the fact that Samsung did initially try to settle the matter out of court but dint have any choice when Apple sued. They obviously were worried about loosing the lucrative business.
6) Add it to the fact that Samsung has announced investments over $4 Bn in its chip plant is US that makes processors for iphone and ipad. Thus Samsung has committed itself more to Apple than the extent to which Apple has committed itself to Samsung.
In any case this chapter of fight between strategic partner cum competitors has some valuable lessons for the trade of strategic sourcing.
1) Vendors in HVAC market are consolidating various brands under one umbrella but with separate verticals in India. Although the verticals are different..repercussions of dispute in one business segment has immediate effect on another vertical. So insistence on key account manager from very senior management should be made mandatory for such key vendors for troubleshooting.
2) When the yellow matter hits the fan..every written word and comma in the PAC/Rate contract matters. So the contracts must be drafted with utmost care and foresight with enough provisions for consequential damages and penalties.
3) Consolidate requirement and have volume advantage while negotiating contracts. But at the same time mitigate the risk..and keep plan B ready in terms of alternate vendor. That way we can try to make the vendor more dependent on us while keeping our options open.
4) Finally have commitment of top most management to the relationship with the strategic sources. That way flare ups of operational issues can be contained before they seriously threaten the relationship. Channels of communication should remain open at all times.
After this write-up of mine..there were lot of developments on this front Samsung Vs Apple..Would try to see how many of the guesses in this write up turned out to be correct.
