Abstract:
For a long time, Apple has had strong bargaining power in the flash memory supply chain due to its huge procurement scale. But the balance of negotiations between Apple and suppliers is shifting as AI data centers go on a memory chip shopping spree and flash memory suppliers find new customers willing to pay higher prices.
The Wall Street Journal recently published an article revealing the details of years of negotiations between Apple and flash memory suppliers: supplier representatives have to prepare food for late-night negotiations; when chip prices fall, Apple sometimes even rejects products that have been ordered before, forcing suppliers to bear inventory or continue to cut prices.
Deliberate mistreatment of supplier representatives?
Reports indicate that negotiations between Apple and suppliers often last until after midnight, with no dinner or rest time scheduled in between. In order to cope with long negotiation meetings, some supplier representatives will carry nutrition bars with them to cope with the physical problems caused by being unable to eat for a long time.
Apple will also require suppliers to provide most-favored customer treatment to ensure that other companies cannot obtain lower supply prices from suppliers than Apple. Apple also needs to review the financial information of suppliers to understand the sales and production status of suppliers.
Here is a case: Apple once discovered that Micron was offering lower flash memory prices to other customers, which caused Apple's dissatisfaction. For this reason, Apple threatened Micron and initiated arbitration. In the end, Micron settled with Apple Pay in compensation of tens of millions of dollars.
Another case is the Japanese flash memory supplier Kioxia: Kioxia executive Scott Nielsen once stopped while riding in the Southern California desert, smashed his old iPod with a rifle and left the fragments on his desk. He tried to use an Android phone to express his protest.
When the flash memory industry is losing money, Apple earns considerable gross profits from storage upgrades:
Beginning in 2023, the equipment purchasing boom brought about by working from home during the epidemic faded, and at that time the price of flash memory fell to about 5 cents per GB. Some research institutions estimate that the entire flash memory industry suffered an operating loss of approximately US$19 billion that year, while Apple's gross profit from selling additional storage space was approximately US$14 billion.
Apple’s storage upgrade prices have long been higher than the cost of adding flash memory. Taking the iPhone 17 Pro launched last year as an example, US users need to pay an extra $200 to upgrade from the 256GB version to the 512GB version, while Apple’s cost of adding 256GB of flash memory was about $15 at the time.
The bargaining power of current suppliers has been significantly enhanced:
The key to the changing situation is that large technology companies are purchasing large amounts of storage equipment for AI infrastructure. Data centers need flash memory to save models, training data and application data, which gives flash memory vendors larger customers and more willing to sign long-term contracts.
Analysts estimate that two years ago, Apple purchased about twice as much NAND flash memory as Microsoft, Amazon, Meta and Google combined. Now the combined purchases of these four companies have become more than twice that of Apple.
Meta, Microsoft and Amazon have signed long-term supply agreements with Kioxia and accepted higher prices. Such contracts help Kioxia lock in orders and revenue, and also give Kioxia more options when negotiating with Apple. However, Apple's procurement scale is still the largest customer in the industry.
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