Galaxy S4: The supply chain halo effect

Samsung's Galaxy S4 launches on Thursday at an event in New York and while most folks will be handicapping the specifications, prospects for the device and the battle with Apple's iPhone there's a bigger business picture to frame.

That picture: Samsung's vertical integration with its semiconductor and display units.

While Apple is the poster child for vertical integration because it integrates its hardware designs with its software and ecosystem, Samsung also has the same mojo with its supply chain. Simply put, Samsung has its own flavor of Apple's halo effect. Apple coined the halo effect phrase to illustrate how iPod, iPhone and iPad sales can lead to Mac purchases.

This supply chain integration---Samsung makes end devices, semiconductors and screens---has been the primary focus among analysts in Korea. The general theory: Galaxy S4 sales will take off and drive demand for Samsung's parts businesses.

YoungChan Kim, an analyst at Shinhan Investment Corp., said in a research note:

With the rollout of the Galaxy S4, we expect earnings improvement for the vertically integrated parts divisions (semiconductor, display). Full-year operating profit is projected to grow 24.5% year over year thanks to the Galaxy S4 effect and earnings improvement in the parts divisions.

In other words, the Galaxy line of devices has its own halo effect for Samsung. One unit buys parts from the other. That reality is part of the reason why Apple has been working to diversify away from Samsung's parts---especially as it weighs an entry to the TV market.

Kim expects the initial round of Galaxy S4 units to be about 8 million units, up from the 6 million provided by the S3. Kim expects the Galaxy S4 to have annual sales of 70 million units, up 75 percent from the Galaxy S3. Kim added:

The Galaxy S4 will likely be a mega hit, bigger than the previous model, as there is no competition from the iPhone with the 5S model expected to be released in 3Q13 at the earliest.

Morgan Stanley analyst Shawn Kim has a similar view:

Confidence is running high at Samsung, which has set big goals for its supply chain with upside of 10mn units per month in terms of peak production by 3Q13. We estimate that this is about 25% higher than its predecessor Galaxy S3 peak monthly production run rate of about 8mn units. We expect S4 to go on sale from mid-April and be deployed at almost 400 carriers and 210 countries worldwide.

That Galaxy production will support processors, memory and Samsung's AMOLED business, which is 85 percent owned by Samsung Display. Here's a look at Morgan Stanley's unit estimates for Samsung's Galaxy S4 and the rest of the product family. 

 

Source : zdnet