Apple may back a bid by its largest contract manufacturer, Hon Hai/Foxconn, to acquire Toshiba’s semiconductor unit. This would be the latest example of Apple increasing its control over critical iPhone technologies and components, a strategy that may be mirrored by Google, if reports that it will invest in LG Display to secure screen supplies for its Pixel smartphone prove well-founded.
Japanese reports said that Apple was looking to team with Foxconn and would invest several billion dollars for a 20% stake in Toshiba’s memory business, which is the world’s second largest player in this market, after Samsung. An investment with Foxconn would be Apple’s first direct stake in a significant memory company.
The increasing self-sufficiency of some large device vendors has come full circle from the early days of mobile phones, when Nokia and Motorola had their own chip divisions and manufacturing plants. They gradually offloaded and outsourced most aspects of handset production, but Apple has been reversing that trend for years now. First it acquired PA Semi in order to design its own processor rather than using Samsung’s; most recently it said it would stop licensing Imagination Technologies’ graphics processor IP and pursue its own design.
In parallel, it has looked to offset the risks of glitches in the supply chain, as its revenues have become more and more reliant on the iPhone. With Qualcomm, it was reported to have tried to secure preferential access to processor manufacturing capacity at TSMC, following some component shortages; it failed, but has hedged its bets by having deals with both Samsung and TSMC.
It has also worked hard to assure access to supplies of memories and screens – often the reason for delays or shortages in handset availability. It stockpiles memory, and if it supports Foxconn in gaining control of Toshiba, that would be a valuable source of this component. It also invested in shoring up Sharp, another ailing Japanese electronics firm, which is important to Apple as a supplier of iDevice screens (and as such, a counterweight to Apple’s continuing, if reluctant, reliance on handset rival Samsung for iPhone parts). Sharp was also ultimately acquired by Foxconn, closing the gap between the iPhone assembler and a source of crucial components.
That pattern could be repeated with Toshiba and its memory chips. At the start of the week, Foxconn – which has been diversifying its business into components and even an MVNO – outbid rivals with a ¥3 trillion ($27bn) offer for the Japanese firm’s chip unit. This was almost one-third higher than other bids from SK Hynix of Korea, Western Digital and Broadcom, according to Bloomberg sources.
As with the Sharp deal, Foxconn would face hostility from the Japanese government to a foreign takeover of a key corporation, especially as Foxconn might look to transfer Toshiba’s manufacturing to its own bases in China or Taiwan, potentially allowing China to gain access to Japanese developed technology. Foxconn is said to have tried to sweeten the pill by securing support from Softbank, the Japanese operator which has also become a force in the chip market thanks to its purchase of ARM.
However, no meaningful domestic offer had materialized until Tuesday, when in another echo of the Sharp saga, Japanese government-owned INCJ (Innovation Network Corp of Japan) said it might take part in the second round of bidding.
Chairman Toshiyuki Shiga said INCJ might look to be a junior partner in a group bid, mainly to reduce the risk of Toshiba’s technology being leaked to an unapproved company. The Japanese authorities will be aware that China is building 3D NAND memory fabs in Wuhan and Nanjing as it looks to create a robust homegrown memory industry, but that it badly needs advanced process technology for them.
It is possible that INCJ might join forces with Hynix, which has also been courted by Hon Hai, but is said to have resisted because of the likelihood of technology transfer to China by the Taiwanese manufacturer. Hynix is keen on a joint bid with Japanese investors, taking about 20% itself. Toshiba could also seek a bail-out via group financing from multiple domestic companies, though Fujifilm Holdings is the only company to have expressed interest in this so far.
Despite the impact of its Pixel smartphone, Google does not have the worries about high volume component supplies that Apple does, but it does share the need to control how key differentiators, such as displays, evolve. Apple’s interest in Sharp was partly because that firm has cutting edge LCD technology which could help set future iDevices apart from rivals; now Google is reportedly looking to invest at least $880m in LG Display to boost production of advanced OLED screens for Pixel – and presumably to gain preferential access to supplies, and some level of influence over future development. (Apple has a similar agreement with Samsung Display.)
The Yonhap News reported that Google hopes to “secure a stable supply” of screens to reduce its dependence on Samsung Display, especially now that Samsung has a $4.3bn deal to supply iPhone screens for the next model, helping Apple make the transition from LCD to OLED. Samsung is investing heavily in OLED capacity and technology, driven by the Apple agreement, but this could make a smaller buyer like Google feel sidelined.