Apple's China memory gamble backfires, but it still has a leg up on Samsung

Samsung's semiconductor division is making money hand over fist due to the AI-driven demand for memory chips. This has made it extremely difficult for consumer electronics manufacturers to find supply at prices that are reasonable enough for them to prevent substantial price hikes for end users.

The company's mobile division is facing losses because of this, even though it's part of the same organization that's making the most of the memory shortage. No wonder, then, that its latest foldables are more expensive and price hikes are already being rumored for next year's Galaxy S27 series.

Apple tried to find another way, one that involved opening itself up to criticism. The company let out feelers that it was willing to source memory from China's CXMT. It spent considerable time lobbying the US government for a waiver that would enable it to source memory from the state-backed company.

The logic was that since CXMT had been kept out of the global memory supply chain, it may be able to offer commodity DRAM at prices lower than what the three big players, SK Hynix, Samsung and Micron, are charging.

Perhaps Apple's CXMT approach was primarily a negotiating tactic. A credible threat to introduce a fourth supplier that might soften Samsung and SK Hynix's pricing stance.

But that hasn't worked. While reports suggest that CXMT is willing to supply Apple with memory chips, it's asking for prices that are even higher than Samsung's.

It's not like CXMT is sitting on idle capacity or unsold inventory. Most, if not all, leading Chinese companies like Huawei, Xiaomi, OPPO, and VIVO, alongside major Chinese internet companies including Tencent, Alibaba, and ByteDance, have locked in CXMT's production capacity through high-priced, long-term contracts.

Those companies have their own AI infrastructure needs, and since they can't easily tap into global memory supply chains, CXMT is their only reliable alternative.

This lays bare an uncomfortable reality for anyone waiting for device prices to return to where they were. The CXMT approach was the most significant test of whether any existing alternative supply could provide pricing relief.

When a supplier that's under consistent pressure from the US government declines to budge on pricing and the opportunity to supply memory chips for hundreds of millions of Apple devices, it's the clearest single data point yet about how completely the DRAM market's power structure has shifted.

CXMT must be seeing considerable local demand to not feel the urge to undercut the major players on pricing. As things stand, its price floor is basically what Samsung's is for memory. Everyone, including Apple, who wants chips can either match it or pay more than it to lock supply.

Any hope that Apple may have had that it could potentially undercut Samsung's mobile division on price, or at least give customers the impression that it doesn't have to raise end prices for consumers as much as others need to, is now lost. Apple customers must face the same market realities that exist for those who prefer buying Samsung.

The question that remains is whether Apple will utilize the profit juggernaut that is its services business, which includes the App Store, Apple Music, iCloud, Apple TV+, to subsidize hardware pricing decisions that Samsung simply cannot make.

For Apple, holding iPhone prices flat while memory costs rise is a margin management decision. Samsung's mobile division has no other option but to take a loss, because there's no other part of the business that brings in the kind of cash that Apple's services business does.

Apple's balance sheet might buy its customers some time before they have to bear the full brunt of the prevailing market dynamics. For Samsung's customers, that time has already run out.