How Apple Squeezed Memory Suppliers — and Why the Leverage Is Gone

October 29 — The Wall Street Journal reported yesterday that Apple used “gangster-like” tactics in negotiations to push down memory prices, including demanding that suppliers accept sweeping financial audits, deliberately acting indifferent about volume commitments, and applying various kinds of psychological pressure at the table.

But the DRAM and NAND price surges of the past two years have turned the tables. Apple’s once-formidable bargaining power seems to have vanished almost overnight, and memory suppliers that used to be squeezed can finally stand firm — some of them would now like Apple to taste what it feels like.

Over the past few months Apple has publicly complained that memory prices are absurdly high, and has raised product prices sharply, citing soaring costs for key components. But Sumit Sadana, a senior adviser to Micron’s CEO, has said that some manufacturers that pushed prices especially hard bear responsibility for the industry’s long-running capacity shortage.

The executive also noted that Micron’s gross margin briefly turned negative a few years ago, because certain customers took advantage of a downturn in the memory and storage cycle to buy at extremely low prices.

The Journal reports that Apple asks flash suppliers to give it “most-favoured customer” status so that it always gets the lowest price. To make sure suppliers comply, Apple continuously audits their books — and it ordered so many audits that Deloitte was able to negotiate a bulk discount on them.

That frequent auditing gives Apple direct insight into suppliers’ operations and factory output, letting its negotiators judge precisely how large an order a manufacturer needs. Apple also used the clause successfully to bring arbitration against Micron for selling NAND to other customers at lower prices, winning a large payout.

To make matters worse, when flash prices start to fall Apple sometimes refuses to take delivery of chips it ordered, leaving suppliers with unsellable inventory that they eventually have to dump at low prices.

Apple’s negotiating tactics are also infamous for their aggression. Former procurement chief Tony Blevins, for instance, would deliberately schedule meetings with different suppliers at the same time so that competitors would run into each other, raising the pressure on both sides.

Apple executives would also drag intense negotiations past midnight without providing dinner or breaks, forcing supplier representatives to survive on nutrition bars. If Apple decided a supplier was being uncooperative, it would threaten to call Blevins in and use his near-gangster reputation to make the supplier’s people give way.

In 2015, for example, SanDisk found that other customers were willing to pay more and refused to supply Apple with extra chips. Blevins then threatened SanDisk’s sales representatives that he would make the company’s then-CEO, Sanjay Mehrotra, “crawl on his knees” to ask Apple to buy from it.

It is worth noting that Sanjay Mehrotra is now Micron’s CEO — which makes the two companies’ current standoff rather less surprising.