Apple pays Samsung $770 million display penalty and 'doesn't trust Korean suppliers'

Apple pays Samsung $770 million display penalty and 'doesn't trust Korean suppliers'
Samsung reported surprisingly good Q2 earnings last week, considering the slump in demand around many of the industries it covers, and now we know why. Remember the rumors that Apple had reportedly ordered 100 million OLED panels it signed a contract for but a lot of those were never used due to the tepid iPhone demand cycle?

Apple allegedly signed a contract for a 100 million screen panels at about $70 apiece, making iPhone displays the most expensive part in them by far. Those were the days when Apple hoped its unique Face ID technology will be gobbled up by iOS users worldwide, and it jacked up the price of the first handset that had it - the iPhone X - to unseen heights. 

Fast forward to 2019, and not only the iPhone X didn't do as well on the market as predicted, but also the subsequent iPhones with OLED displays aren't selling as well as hoped for various reasons. Samsung built those dedicated Apple production lines, but the bonanza of iPhone panel orders never came, as folks are holding their handsets for longer now, and were unimpressed with Apple's OLED-equipped offerings that go for much more than their LCD-laden predecessors.

Thankfully, Samsung has good contract lawyers who managed to wiggle compensation language in the case of missing orders. Korean media is reporting that the mysterious 900 billion won sum (about ($765.5 million) that appeared as a lump income in Samsung Display's earnings is precisely the compensation amount that Apple has offered Samsung.

On one hand, there was a claim that Apple has already paid Samsung hundreds of millions of dollars to make up for the lost business that brought Samsung Display's earnings drastically down - from $4.9 billion in 2017 to $2.3 billion last year. On the other, Apple has reportedly offered to order OLED panels for other products than the iPhone, including iPads and Macs, as a means to ramp up production, said one unnamed "industry official." Of course, the two aren't mutually exclusive, as Apple may have simply pre-paid for those rumored future orders, too.

In any case, Samsung Display is now $770 million richer, and the amount may have very well come from Apple, whose pivot to OLED panels isn't panning out as it hoped. In another interesting Korean report today, Apple is apparently weary of local suppliers, and is working with a broker that can vouch for them, in this case LG Electronics’ Center for Material Production and Equipment Innovation. 

The center is in hot water now, going into am explanation mode that it doesn't take "bribes" from suppliers to suggest them to customers, but simply takes fees for its services. According to one LG exec local suppliers would have had a hard time working on Apple device, for instance, if it weren't for them:


While the LG center exec gives this as an example that their supplier brokerage department is actually adding value by exposing Korean firms to world-class customers and production practices, the Apple bit caught our attention for another reason.

So powerful is Samsung's near-monopoly on small high-end OLED screens that Apple, apparently averse to direct meetings with suppliers and signing contracts with them, had to sit down and do just that if it didn't want to fall behind the times in screen developments. Alternatively, Apple's reported aversion to contracts with Korean suppliers might have stemmed precisely from the one it signed with Samsung that has now forced it to part with the lofty sum of $770 million for booked but underutilized capacity. 

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23 Comments

1. Phonehex

Posts: 754; Member since: Feb 16, 2016

Tougher times ahead for Apple as its market in phones is gonna deteriorate even more.

4. sgodsell

Posts: 7028; Member since: Mar 16, 2013

This story makes no sense, especially if Apple is going to pay a fine of $770 million dollars for unused display panels at $70 a piece. Just think about it, why would Apple decide to pay Samsung $770 million for unused panels, instead why doesn't Apple just take possession of those 11 million panels instead. Is Apple not going to sell anymore iPhone X, XS, or XS Max devices from this point forward? Apple could even use some of those panels for broken screen repairs. Well unless Apple already has a lot of these displays in inventory? Hmm, that could be the real story in itself. Now that I think about this more, Apple probably already has a lot of inventory of those panels, and realized that we are never going to use anymore than the 89 million panels that we currently have in possession. Well at least until Apple decides to change the top notch space, and make it smaller. Who knows what's going on in Timmy's head these days.

10. shm224

Posts: 276; Member since: Mar 19, 2015

Yeah, I agree that the writer doesn't have any idea how the industry or contracting works. The penalty most likely doesn't cover "profit" that Samsung Display would have made if Apple actually fullfilled its promise -- it just covers the massive CAPEX and operational cost that Samsung was asked to build, that is now underutilized and losing money everyday. We are talking most likely 20 or 30 millions fewer panels here and it's highly unlikely that there would be that many defective or broken panels during their product lifecycle, especially considering Samsung's well-known quality components. so much for supply-chain wizard.

17. Mike88

Posts: 227; Member since: Mar 05, 2019

Rumors are next iphones will have same display size so why would they pay fine for unused displays instead of buying them and using in their next iPhones.. Even if they change the screen size the iPhone XS will be sold for many years to come just like iPhone 6s and 7 are still selling well so it doesn't make sense that the mysterious won money came from Apple. Samsung should be interrogated about the source of the money they declared as won.. Maybe some govts provided it to spy on people. Otherwise they could be in legal trouble

18. shm224

Posts: 276; Member since: Mar 19, 2015

Your comment is as insightful as the author's, which is to say clueless. #1 Apple won't be using the same exact display on next phone. #2 their contract isn't just for one year #3 Samsung's $7+B OLED plants are underutilized and losing money when they are not fully utilized #4 Samsung is not Facebook, or at least not NSA.

2. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

770m means that Apple overestimated the production by 11m devices. But it's hard to believe that Apple paid that money instead of just ordering the panels, build the iPhones and keep them in warehouses until they could be shipped to the distributors... People will buy XS devices well into 2019-2020, Apple will soon deliver iPhones made in India (so they already have new productions lines); 11m means just a few weeks worth of devices. There something that doesn't add up, but the future of A-S collaboration will gives us the answers.

3. Back_from_beyond

Posts: 1299; Member since: Sep 04, 2015

It would mean that Apple reduced the orders by 11 million units if not more as the penalty wouldn't necessarily have to match the units amount. The reason would most likely be that worldwide stock of iPhones with those displays is significant enough not to have to make more anytime soon, which suggests sales continue to slump and are showing no signs of improvement.

5. sgodsell

Posts: 7028; Member since: Mar 16, 2013

This means Apple already took possession of 89 million panels. This means Apple has not even sold close to that many iPhone XS, or XS Max's, or at least Apple has a long way to go to even create and sell 89 million XS, or XS Max's. That is the big story in itself.

7. TBomb

Posts: 1276; Member since: Dec 28, 2012

That's rough... There's definitely some fine print in the contract that we aren't aware of. Setting up a dedicated production line for a buyer is probably expensive so Samsung needed to make sure they were going to benefit from the relationship. Apple had confidence it would sell lots but fell short and never asked for deliveries of x-amount and had to pay for the production line dedication or something. That's my guess. $770M is a lot of money for anyone and I'm surprised supply chain expert Tim Cook let this happen

12. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

"I'm surprised supply chain expert Tim Cook let this happen" That's why there's something that doesn't add up; we're talking about ~800 mil - a s**tload of money - a person like Cook would have had an idea what to do in order to minimize the expense...

14. Back_from_beyond

Posts: 1299; Member since: Sep 04, 2015

Maybe sales are just down a lot more than they had expected when they signed the contract. Sales being down by 20% in China hits hard, sales are down in other markets too, including some in Europe. With iPhones being a multi- billion dollar revenue stream, you can expect penalties for missed or cancelled component orders to be high too.

15. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

Maybe.

19. lyndon420

Posts: 6599; Member since: Jul 11, 2012

The article stated how apple had to do things a little different this time by signing an actual direct contract with a supplier...in this case Samsung. Tim didn't have much of a choice in the matter.

20. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

I believe Apple signed all its contracts directly with the suppliers. I just told you what Apple could do: build an extra 11m xs devices and store them (or just store the panels until the plants are ready to build the next batch of phones) - it would’ve been cheaper than pay so much money and get nothing in return. There’s something very fishy about what happened and I think this articles are speculating, because they are based on the fact that Apple is managed by stupid people, which is anything but true.

22. oldskool50

Posts: 962; Member since: Mar 29, 2019

Samsung has always set up a dedicated line for parts for devices for other OEM's. When you consider Apple is or could sell 200M devices, you need to dedicated specific amount of resources. Apple's parts are usually custom made and thus they have to tool a line specifically for them, because they are custom. This also means they have less available to offer production to other outfits. So that means Apple needs to pay for what potentially would be loses in revenue. The contract seemed simple and normal. You requested 100M displays, we made them and now you need to pay for them. PERIOD.

23. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

I'm saying something different: Apple can simply get the displays (770 m means 11 mil) and store them for future use (because they are stil going to produce an sell the XS); why would Apple pay so much money for NOTHING - that makes no sense (unless we presume the management is stupid and Cook is anything but stupid).

6. Cat97

Posts: 1804; Member since: Mar 02, 2017

It all started with the stupidly priced iPhone X. Apple greediness came back to bite them. No phone manufacturer does better today due to the higher prices. And the prices aren't even actually higher (except Apple's prices), only on paper. I bought a Galaxy S10e for $650 and a Galaxy S10 for $700, 3 months after release. That's why Apple's phone business suffers, they are too proud to admit and reverse their mistake.

13. Leo_MC

Posts: 6935; Member since: Dec 02, 2011

X is priced just like other iPhones and pretty much like galaxies; it's an expensive phone to make => it's an expensive phone to sell.

8. BlackhawkFlys

Posts: 908; Member since: May 07, 2014

"So powerful is Samsung's near-monopoly on small high-end OLED screens that Apple, apparently averse to direct meetings with suppliers and signing contracts with them, had to sit down and do just that if it didn't want to fall behind the times in screen developments. Alternatively, Apple's reported aversion to contracts with Korean suppliers might have stemmed precisely from the one it signed with Samsung that has now forced it to part with the lofty sum of $770 million for booked but underutilized capacity. " Somehow I managed to understand what these sentences wanted to say. Phonrarena is writing a paragraph long sentences. Please make those sentences short so that we can understand them. Thanks

11. shm224

Posts: 276; Member since: Mar 19, 2015

The writer doesn't seem to understand the industry either. Take for instance Apple's contract with wireless carriers. Apple has had the much worse, stringent contracts with them for well over a decades -- ie, Verizon, Sprint, AT&T and pretty much everyone is required to pay some huge penalty if they failed to sell a certain number of their products (ie, millions of iPhones). It's hilarious. Apple thinks it's unfair that, after demanding Samsung Display to spend $7+B to build additional OLED fabs to serve Apple's ill-forecasted demand, now it's throwing tantrum after failed to fullfill their promise. Classic Apple! Time Apple's supply-chain wizardry at work!

9. OneLove123

Posts: 881; Member since: Aug 28, 2018

That6 why the ugly iPhone XR is their best seller with low quality LCD screen.lol

16. sgodsell

Posts: 7028; Member since: Mar 16, 2013

It's the best selling new iPhone because customers don't have a big choice to choose from, especially if you want an iPhone. However in many countries it's not inexpensive or great value, like Timmy said. At $1030 CAD for a 64 GB low resolution iPhone XR with a single camera, is a joke. No wonder why Apple's sales declined.

21. oldskool50

Posts: 962; Member since: Mar 29, 2019

Apple knows what is in the contarct when they sign it. Samsung didn't sneak or wiggle anything they didn't know about. Again another article trying to take another cheap shop at Samsung. What for?! Apple ordered 100M displays. because Apple's displays have to be custom made, they have to also dedicate a factory to it as well, this costs Samsung money. if Apple places an order, they are on the hook for the order, once Samsung has spent the money to do the product run it was contracted to do. It is not Samsung's fault apple over-estimated how many phones they were gonna sell. One thing we do know is if Apple ordered 100M OLED displays total for the iPhone X family which is only 3 devices, and they haven't even sold enough phone to even cover that order, then we know for a fact the iPhone X models have been selling like crap. Just because Apple can't sell their overpriced phones, doesn't mean they shouldn't pay Samsung for the order they requested. You still owe the money and yes Samsung should get the full contracted amount. If Apple didn't trust the companies they do business with, they wouldn't be doing business with them. One thing for sure, when Apple has order parts from both LG and Samsung, LG and Samsung have always been committed to filling them and have always do so. Your continued attacks on Samsung or in this case even LG, is just wreckless and libel. If Samsung came here and read your articles, they would likely sue you out of existence.

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