In May of 2012, in our commentaries related to high-tech and consumer electronics industry, Supply Chain Matters coined the analogy of the shiny apple and the complex orange. It related to that of Apple and Samsung and their competitive battles in the smartphone market.

The analogy drawn was that the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Sometimes the apple can develop blemishes, but consumers can overlook the blemish and still relish the taste. The apple has an iconic brand image and a warm memory.

The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes.  The orange serves as a multi-purpose fruit, not only for direct eating but as an ingredient or compliment to other foods. The taste of the orange is often tart or bristle to the palette, its skin is difficult to remove and its pulp is complex layering. That orange analogy referred to Samsung.

For years, Samsung itself has exercised a supply chain vertical integration model that has served that company well in its ability to continuously refresh innovation in products, support faster time-to-market and quickly ramp products to enormous global wide volumes. In February 2012, Fortune magazine featured a profile of Samsung noting that the secret sauce of the company is that it controls the supply chain of many of the building blocks of its phones, tablets, electronic watches, and other electronic devices. The not so secret sauce is that major consumer electronics value-chain components such as leading-edge semiconductor chips, high-resolution LCD displays and memory components often come from Samsung’s electronics business units and supply many other branded providers.

Last week, business media reported that the South Korea based technology giant expects its recent December-ending fourth-quarter operating profit to rise upwards of 49 percent from the year earlier period. In its reporting, The Wall Street Journal’s opening paragraph in a January 5th report exclaimed:

For a quarter in which Samsung Electronics Co. suffered its most embarrassing product recall in its history, the world’s biggest smartphone maker has also forecast its strongest profit in more than three years.”

In a separate article the next day, the WSJ wrote:

Even with the early-October recall of its premium Galaxy Note 7 smartphone that cost it at least $5 billion, Samsung projected fourth-quarter earnings would be the highest in more than three years. The reason: competitor’s growing demand for Samsung components.”

This article (Paid subscription required) observes that global smartphone shipments have slowed sharply, registering less than one percent global growth in 2016.  Our analogy of the orange comes embedded in this WSJ observation:

Even as smartphones were selling strong, Samsung continued to pour tens of billions of dollars into semiconductors and display panels to enable phones to run faster, hold more storage and offer crisper images. Recent advances have made its components more powerful than those of competitors—positioning Samsung as an essential parts supplier for many of its rivals.

The profit forecast has pushed Samsung stock to record highs, and investors have obviously turned from gloom to elation.

We suggest a couple of takeaways can place this new development in perspective.

First, there should be no question that the Samsung brand image took a major hit with the exploding Galaxy Note 7 product recall debacle, followed by the exploding laundry machines. The memory of media accounts of exploding phones and announcements banning Samsung Galaxy Note 7 phones from air travel remains ingrained on the minds of consumers. That will take time to overcome. However, the company will learn from this incident, and that learning will be transferred to new product and component designs.

Samsung’s broader vertical supply chain focused strategy for high-tech electronics component innovation and value-chain penetration has proven thus far to be a far more insightful strategy, particularly as increasingly electronics and information-laden intelligence continues to be embedded in other products such as autos, trucks, and machines. It remains a manifestation that supply chains do matter in the context of supplier-driven product innovation and industry scale. As the WSJ observed, even if the Galaxy Note 7 was a somewhat successful product, limited global market growth of the market itself would have limited is profit contribution.

The reward is benefiting from the broader advances in high-tech electronics among numerous brands.

Bob Ferrari

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