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Business

'Chaebol' saved, ironically, by a white knight

SEOUL/SILICON VALLEY -- Samsung Electronics and Apple continue to engage in legal disputes over smartphone patents, but chip orders from Apple for the iPhone 6s series likely helped Samsung post its first profit increase in two years in the July-September quarter.

     Opening up the latest electronic gadgets and analyzing their building blocks is now a tradition among information technology news sites. Naturally, they took apart Apple's iPhone 6s phones as soon as they became available in September. Inside, they found Samsung-made central processing units and other chips.

     

This was news because Apple had switched suppliers of many of the chips in the previous iPhone series from Samsung to Taiwan Semiconductor Mfg. Co., better known as TSMC. According to reports on iPhone 6s components, the big South Korean electronics maker has won back a number of contracts from TSMC.

     Apple gave the contracts to TSMC due to fallout from its patent disputes with Samsung, which began in 2011, when Apple sued Samsung. Steve Jobs, the late Apple chief executive, used to call his company's South Korean supplier and rival "a copycat."

     In April 2014, Apple ran a full-page ad in the U.K.'s Guardian and other newspapers. "There are some ideas we want every company to copy," the ad's headline read. The rest of the ad talked about Apple's use of renewable energy, but it was written in a way that "copying ideas" could be interpreted as Apple taking a dig at Samsung over its alleged patent breaches.

"Already higher"

The relationship began improving after the two companies agreed in August 2014 to consolidate their patent disputes, which had been fought in 10 countries, in U.S. courts.

     This development was not unrelated to the rise of startup smartphone makers in China. As the once-threatening sales growth of Samsung's smartphones stalled, Apple had less motivation to attack the rival. Consequently, Apple stopped running ads that appeared to make fun of Samsung.

     Leadership changes at both companies also likely played a role. Jobs passed away in 2011, and Samsung Chairman Lee Kun-hee remains hospitalized since a heart attack in May 2014.

     Samsung Vice Chairman Lee Jae-yong, the chairman's only son, attended Jobs' memorial service and held a meeting with Tim Cook, Apple's new CEO. The corporate relationship began to thaw.

     As tensions eased, the two companies resumed business dealings. Apple first began procuring DRAM and other memory chips from Samsung. Before the patent disputes broke out, transactions between the two heavyweights were estimated to have exceeded 10 trillion won ($8.76 billion) a year. "The current amount must be already higher than back then," one market analyst said.

     This is partly because Samsung's chip business used to rely heavily on memory chips but now also includes CPUs.

The Japanese path

The electronics arm of the Samsung chaebol on Wednesday reported a group operating profit of 7.3 trillion won for the July to September period, up 80% from a year earlier. While the figure beat market expectations, there was no self-congratulatory back-patting. Smartphone sales remain weak, and Samsung needs to find new drivers of future growth.

     One reason the company has been unable to escape a stagnant business climate is the absence of its powerful chairman. Since he remains in a hospital, his eldest son has been acting as the de facto leader, but it is impossible for the vice chairman to implement drastic changes while his father still has the chairman's title, one insider said. "South Korean culture shuns children overstepping their roles," the source said.

     As a matter of fact, most major positions at the smartphone division remain unchanged from before the chairman's hospitalization.

     If the chairman is unable to return anytime soon, Samsung must promote his son to chairman or create a mechanism that enables him to assume complete control of the company. Considering this, the Samsung group's traditional personnel shuffle in December will likely receive much more attention than usual this year.

     Another interesting note on the Samsung-Apple topic is that Samsung's business recovery seems to have been driven by its components divisions. Japanese consumer electronics makers took a similar path when their brand power was weakened by cheap South Korean and Chinese knockoff TVs and other products.

     Now Samsung is under similar pressure, though it also has Apple to compete and litigate against.

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