Apple pays Samsung estimated $950M for missing OLED purchase targets

Apple may have paid Samsung Display in the region of $950 million, analysts believe, a hefty penalty paid out for not buying enough OLED panels to meet a contracted minimum amount.

As with many firms in the iPhone supply chain, Apple has agreements to make a minimum purchase of specific goods or services, typically to achieve a specific price per unit that both companies are happy to work with. In cases of lower-than-expected demand, changes in orders could mean Apple misses purchase targets for components, which in turn leads to financial penalties.

Citing a report from TheElec in early July, analysts at DSCC highlighted an element of Samsung's earnings guidance for the second quarter of 2020, namely an element where Apple was making a one-time payment to Samsung Display. While the revenue guidance was down 7% year-on-year at KRW 52 trillion ($46 billion), the high operating profit guidance of KRW 8.1 trillion ($6.6 billion) was up 23%, and far higher than analyst expectations at the mid-6 trillion won level.

It was reported that the one-time payment from Apple added to the operating profit, but a figure wasn't given for the value. Initial reports put Apple at making a payment in the region of KRW 900 billion ($749.7 million), caused from purchasing too few OLED panels than contracted.

According to sources of DSCC, Apple's payment was at a far higher level, believed to be closer to $950 million. In effect, the Apple payment is thought to have turned what would have been an operating loss for Samsung's display business into an operating profit.

There is no explanation for the shortfall, and while it is likely due to a combination of factors, the most likely culprit would be COVID-19, with the global pandemic affecting the vast majority of Apple's supply chain, as well as demand for its products. In June, Gartner claimed shipments for the iPhone slumped in the first quarter by 8.2% year-on-year.

This is not the first time Apple has paid Samsung for missing purchasing targets. In 2019, Samsung was thought to have received an estimated $683 million from Apple for similar reasons.

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17 Comments

wonkothesane 1737 comments · 12 Years

About 4 years ago

Just to put this into perspective: Samsung Display earns between 4 and 8 B every quarter over the last three years.

Apple OTOH books some 10-20 B net income per quarter.

netrox 1501 comments · 12 Years

I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized.

gmgravytrain 884 comments · 8 Years

Analysts don't know for sure Apple has paid this much, do they? I hope they're not just guessing this figure.

blurpbleepbloop 202 comments · 18 Years

netrox said:
I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized.
When talking about serious volume orders companies universally negotiate a price at a given volume. The better the volume, often a better price can be achieved from a vendor. A guarantee to buy/sell a certain minimum allows a vendor to ensure that a contract to sell will meet their baseline opportunity cost as well as ensuring any hard cost they will have as a result of preparing large orders will be covered.

Vendors have to have a ‘penalty’ if their buyers fail to meet their minimum purchases otherwise they can be left holding the bag for unused components and other sunk costs made because of the purchase agreement.

In Apple’s case, I’m sure they had already accounted for all the screen they might need for repairs. They have a lot of data telling them how many they’ll likely need for any number of units sold.

MplsP 4020 comments · 8 Years

netrox said:

I am not sure how you get penalized for not meeting the minimum purchase? Isn't it a custom to buy ALL of them to avoid being penalized? Can't those extra screens be saved for repairs when needed? Apple could repair for a lot less and their loss would be minimized.

Perhaps - but if the price of buying the screens exceeded the penalty, maybe not. theoretically, the penalty would be enough to cover Samsung's profit loss on that volume. Also, what does Apple do with the screens? If they've already accounted for expected future production and repairs like @blurpbleepbloop stated, they would end up with a bunch of surplus. Screens typically aren't interchangeable between iPhone models, either, so they would likely end up as e-waste.