iPhone patent stoush reveals ties that bind

By Adam Satariano, Ian King

Whatever the jury decides at the end of Apple's trial against Samsung, Apple's deep ties to Samsung are becoming more apparent even as the two companies clash in court.

Apple accounts for 8.8 per cent of Samsung's revenue, making it the company's largest customer, according to a Bloomberg supply-chain analysis.

Apple is producing testimony intended to prove that the South Korean company copied patented technology for smartphones and tablet computers.

"There are a number of Samsung phones and two Samsung tablets that are substantially the same as those" described by Apple patents, Peter Bressler, an inventor of 70 design and utility patents, yesterday told a jury in San Jose, California.

Bressler, who teaches product design at the University of Pennsylvania, was the latest expert to testify for Apple, laying the groundwork for infringement claims. The California-based company seeks US$2.5 billion in damages.

The allegations over intellectual property contrast with the lucrative commercial ties that bind the two companies.

Apple's reliance on Samsung chips for its best-selling phones and tablets will be worth as much as US$7.5 billion to Samsung this year, a 60 per cent jump from 2011.

Because Apple would struggle to find an alternative supplier for the main processor in its mobile devices, the computer maker can't quit buying from its competitor any time soon, whatever the trial's outcome.

"As much as these companies go head to head, there's a definite intertwining there that makes it a real ugly divorce if it were to take place," said Len Jelinek, an analyst at market researcher IHS.

"Apple cannot, under any circumstances, be caught in a capacity-crunch situation."

Apple's spending has helped arm Samsung with resources to fuel a surging mobile-phone business that's now the global leader.

At a time when there are few other manufacturers able to reliably produce the millions of key chips Apple needs each quarter, switching to an unproven partner could result in parts shortages that might help Samsung grab even more market share.

Samsung, meanwhile, would risk losing the business of its biggest customer if Apple were to move elsewhere.

The two companies on July 30 began the jury trial in San Jose to try Apple's claims that Samsung copied its iPad and iPhone designs and Samsung's counterclaims that it is the victim of patent infringement by Apple. Samsung's next biggest customer is Hewlett-Packard, providing 3.2 per cent.

Samsung and Apple's interdependence traces its roots to the beginning of the iPhone.

Ahead of the 2007 debut, Apple realised it needed a processor better tailored to the device.

A microprocessor acts as the brains of a device, determining how fast it runs and letting it perform critical tasks.

Apple turned to Samsung, then ramping up a division that makes so-called logic chips, which handle the devices' other functions.

The two companies, which had already worked together in screens and memory chips, cut a deal that resulted in Samsung becoming the sole manufacturer of the so-called A-series of chips, which are at the heart of the iPhone and iPad.

Together, those products generated US$67.4 billion in sales for Apple in the latest fiscal year.

The company may spend about US$2.1 billion on A-series chips this year alone. About 20 per cent of Apple's iPhone is comprised of Samsung technology, the South Korea-based company said last week.

Other chipmakers would probably welcome Apple's business.

Taiwan Semiconductor Manufacturing, the largest maker of chips to order, said last month that it was open to devoting one or more factories to a single customer.

The statement was aimed at Apple or Qualcomm, another maker of mobile chips, according to Sam Wang, an analyst at Gartner.

Still, switching to another foundry such as TSMC would bring challenges.

TSMC would have to limit orders from other customers to accommodate Apple's needs, and it uses a different production technology than Samsung, requiring a redesign of the processors from the ground up, Wang said.

TSMC rival United Microelectronics (2303) is too small, and Globalfoundries is too far behind on production technology, he said.

"There's an incredible cost to doing that, and it would be very difficult," said Michael Hasler, a former supply-chain management executive at chipmaker Applied Materials, who now lectures at the University of Texas at Austin.

"On the surface it seems like an obvious thing to do, but actually executing it would be very expensive."

HIGH STAKES
* Apple claims that Samsung copied its iPad and iPhone designs and Samsung counterclaims that it is the victim of patent infringement by Apple.
* The companies also have sued each other in other countries in a bid for dominance of a mobile-phone market.
* That market was estimated to be worth about US$320.4 billion last year.

- Bloomberg

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