Apple And Amazon Make Strange Bedfellows In The Chip Business

Toshiba is up almost 11% in two days on chatter that there are bids as high as 3 trillion yen for its chip subsidiary.

The latest buzz being reported by Japanese daily, Mainichi, is that Foxconn is looking to also get the backing of Amazon and Dell, in addition to Apple, in its effort to win the approval of the Japanese government to take over Toshiba’s foundry business.

According to Mainichi, Foxconn is planning to ask Amazon and Dell to take a 10% each stake in the unit, while Apple will take a 20% share, with the rest going to Foxconn assumedly.

With Apple locked in a major dispute with Qualcomm, one of its chip suppliers that happened to report its March quarter earnings yesterday, an investment in Toshiba flash memory unit would go a long way in helping Apple gain further leverage versus Qualcomm.

 

Here is what Qualcomm said about its dispute with Apple last night on the conference call:

“In Q2, Apple (AAPL) interfered with the license agreements between Qualcomm and the Apple suppliers by actively inducing them to underpay the royalties they owed to Qualcomm for sales during the December quarter. Apple withheld payments to their suppliers for sales in the December quarter in an amount equal to what Apple claims Qualcomm owes to Apple under a separate cooperation agreement between the companies… Apple suppliers then underpaid royalties to Qualcomm in the same amount. In the aggregate, this amount is approximately $1B. Most of Apple’s suppliers have already reported the royalties they owe to Qualcomm for sales to Apple during the March quarter and they are obligated to pay the full amount of those royalties to us. While we would expect Apple suppliers to pay the royalties they owe us under their license agreements, it is possible that Apple will continue to interfere with the Apple suppliers license agreements, leading those suppliers to breach their contracts with Qualcomm by underpaying some or all of what they owe us. We expect to have more visibility into this in the coming weeks. Given this uncertainty, our Q3 guidance assumes a range of possible payments from the Apple suppliers but does not reflect a scenario that Apple suppliers pay nothing to us for March quarter sales.” 

The last line states that Qualcomm expects to get paid at least partially on the $1B that Apple has held back from its suppliers who, in turn, did not pay Qualcomm.

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This matter will not get resolved quickly, however an investment in Toshiba’s chip-making business could possibly bring Qualcomm to lower its royalty rates and requirements going forward. That would benefit not just Apple but most of its supply chain as well.

Qualcomm management did state on the conference call, “We expect to continue to be an important supplier to Apple now and into the future.”

That could change pretty quickly if Apple, Foxconn and company are successful in their bid for Toshiba’s chip business.

If Apple and Amazon, as partners with Foxconn and Dell in Toshiba’s flash memory business, do end up as owners of the unit, it will be a partnership that will catch most by surprise.

Think about it, a Taiwan based company (Foxconn) partnering with 3 of America’s best known companies, Apple, Amazon and Dell, to buy out a Japanese conglomerate’s chip making unit.

The words, “we are living increasingly interconnected lives on a global basis” couldn’t ring more true.

For Apple, the move couldn’t be more timely given its dispute with Qualcomm and the leverage alone it would gain versus the latter could be well worth the price of admission to become a co-owner of Toshiba’s chip manufacturing operations.

Strange bedfellows completely notwithstanding.

(Long aapl, amzn, options on both)

Follow me on twitter @jsomaney, find my other Forbes posts & articles from other platforms at jaysomaney.com where you can get my real-time opinion on the stock markets live daily.

 

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