James Allworth, author and expert on disruptive innovation, has a great post on the blog Asymco titled “The real threat that Samsung poses to Apple.” In it, he refers to an earlier article by John Gruber on Daring Fireball that asks whether Apple’s product design or operational model is their most important advantage. Gruber concluded that it was Apple’s operational strength “that is furthest ahead of their competition, and the more sustainable advantage.” Products can be copied; capabilities can’t.
Or can they? Allworth draws a connection between Samsung’s status as a major Apple supplier and their emergence as Apple’s most (perhaps only) formidable competitor in smartphones. The patent lawsuits over whether Samsung’s products copied Apple’s designs, he says, are a distraction. The real threat to Apple is that Samsung, as one of its key suppliers over the last five years, may have learned to build the critical capabilities it takes to develop and rapidly ramp manufacturing of huge volumes of incredibly powerful and beautiful smartphones at low cost – no doubt one of the most difficult feats in business. As Allworth says, “Perhaps [Samsung] didn’t have to copy Apple. What happens if Apple had already taught them?”
The ramifications of this can be seen in the history of other tech giants. Allworth quotes his book, cowritten with Clay Christensen, in describing the dangers of increasing outsourcing to a key supplier over time:
Asus came to Dell and said, “We’ve done a good job fabricating these motherboards for you. Why don’t you let us assemble the whole computer for you, too? Assembling those products is not what’s made you successful. We can take all the remaining manufacturing assets off your balance sheet, and we can do it all for 20 percent less.”
The Dell analysts realized that this, too, was a win- win…
That process continued as Dell outsourced the management of its supply chain, and then the design of its computers themselves. Dell essentially outsourced everything inside its personal-computer business—everything except its brand— to Asus. Dell’s Return on Net Assets became very high, as it had very few assets left in the consumer part of its business.
Then, in 2005, Asus announced the creation of its own brand of computers. In this Greek-tragedy tale, Asus had taken everything it had learned from Dell and applied it for itself. It started at the simplest of activities in the value chain, then, decision by decision, every time that Dell outsourced the next lowest-value-adding of the remaining activities in its business, Asus added a higher value-adding activity to its business.
In other words, in Dell’s own quest to cede lower-value work to a supplier, it helped that supplier forward-integrate into higher-value work and become a competitor. Fast-forward to the present, and according to Gartner, Dell’s share of PC shipments fell from 16.4% leadership in 2005 to 10.5% last quarter, while Asus has risen from nothing to to 7.3%. Dell built the staircase for its supplier to climb until it was no longer just a supplier. Allworth wonders whether Apple is falling into the same trap with Samsung.
Now, Apple is not yet outsourcing to Samsung (or any one supplier) nearly as much of its value chain as Dell had to Asus by the time Asus was able to launch its own brand. Other differences between the cases abound, so some have criticized Allworth’s post for positing based on a weak analogy with an N of 1 (see his post’s comments).
But what if there’s a pattern? What if Samsung had, in fact, done this before?
In a separate, far-ranging article, the investigative journalists at the Japan Subculture Research Center sought to untie the numerous possible causes of the long, horrifying decline of Sony, once the world’s preeminent consumer electronics company but which expects to lose $6.4 billion this year. Their analysis homes in on the tenure of CEO Nobuyuki Idei from 1999 to 2005, who restructured the company and eliminated many key engineers. According to Sony insiders, these were gobbled up by Samsung, the rising South Korean conglomerate which had become a major component supplier to Sony for technology such as LCD panels.
These panels were used in large flatscreen TVs – last decade’s equivalent of smartphones, in terms of how their huge popularity drove fierce technological innovation and manufacturing capability development. As one Sony veteran put it, “It was better than industrial espionage—Samsung could openly ‘buy’ the technology that Sony had developed simply by rehiring their best and brightest.” An investor remembers a key meeting with Idei:
When the investor pointed out that Sony’s operating profits on electronic products were roughly 2-4% and that Samsung was making similar products at a 30% profit margin, Idei hushed him by saying, “They make the parts for our products. We put them together. It’s the difference between a steel maker and an automobile maker. We make the automobiles.”
The investor countered, “Well, I’ve got news for you—the people you laid off from the car plant are now working at the steel mill, and soon the steel mills will be building cars with your technology.”
In the early 2000s, of course, Samsung forward-integrated and began building high-quality LCD HDTVs at lower cost than dominant Sony. By the middle of the decade it had surpassed its erstwhile customer and partner. This year, Samsung’s share of the category is 29%, while Sony has fallen to 8%. As pundits have noted, “The speed with which Samsung has overtaken its competitors is fairly remarkable.”
Apple has since replaced Sony as the world’s largest and most respected consumer electronics company. This situation is not perfectly comparable – for example, there is no evidence that Samsung is hiring key Apple engineers. But Samsung has become one of Apple’s most important suppliers, and is now also by far its most significant competitor. We’ve seen this movie before. This is Samsung’s style.
As Allworth puts it, this is no longer about whether Samsung aims to use its supplier experience with Apple to replicate its capabilities advantage. The key question is “is it already too late?”
The problem with this analogy is.. TV doesn’t require significant software. Samsung probably “learns” (copies) a lot from Apple but they have no idea how to write software like they do.
And Samsung’s current rise is banking on Google’s Android, which is no longer special now that Google bought Motorola.
Do you think this part of the entire ecosystem Samsung can pull off as well?
I would only believe James Allworth & your argument if Samsung currently develops & controls its own software. Until then, I don’t think Samsung would disrupt all the way.
Thanks for the reply. I agree but the only analogy James and I were trying to make was operational – that Samsung has the ability to rapidly develop high-quality smartphones, ramp up production to enormous volumes, get them into the hands of consumers all over the world, and then ramp them down at the end of a short lifecycle without lots of inventory left over. That’s no mean feat and a key to Apple’s success that Samsung seems to have replicated.
On the software side, I agree that without full control and integration of the OS they won’t be able to match Apple. The key questions, then, are 1) whether this will hamper Samsung’s success long-term, or whether a large segment of consumers will be happy to keep buying Samsung/Android devices, and (2) if not, whether Samsung could “fork” Android the way Amazon did with the Fire to create a custom OS.
I recommend checking out Horace Dediu’s blog Asymco.com for some analysis on these options.
Sure they can. Why not? Samsung has already taken over Android effectively. People do not buy Galaxy because of it’s running Android, they buy them for Samsung brand. In their mind Android ecosystem equals Samsung ecosystem. Your average user does not even know his Galaxy phone is running Android much less which version. All he cares is whether he can install his choice apps and games on his phone. Don’t believe me? Just go out there and ask a random passerby who carries a Samsung Galaxy.
Seriously, what’s tying a consumer to Android ecosystem? Most of Android phone owners do not pay for apps or medias, they either download free apps or pirate them, which brings me to the next point: the only reason Samsung has stuck with Android is because it is a free mobile OS with zero development cost and there is already an ecosystem they can tap into. That does not mean Samsung is dependent on Android. They can easily switch to an alternative OS which is compatible with existing Android apps. At worst, they can fork Android. And you know what? Developers will still follow Samsung, they follow the money after all.
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Kind of neat to look 1.5 years later and Apple supply chain still vibrant (sans Samsung) and providing competitive advantage to Apple. Samsung is compartmented in what commodity parts it provides while Apple invests and partners with the supply chain competitors that Apple uses. Apples selected investments explicitly exclude other companies for a period of time e.g., aluminum machining. When these technologies become commodized, Apple is moving on to the next big thing e.g., Sapphire.
In the case of SAMSUNG, their Galaxy Tabs are a bust, Galaxy S4 and now S5 are not a great success in selling/profit due to design, features choices, and build quality.
I thnk Apple did “learn” from Samsung-Sony and Asus-Dell and the supply chain operations investments and design focus reflect the differences between them and other companies.
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