Apple supplier takes a hammering
• Shares in Dialog plunge after analyst cuts rating on ‘strong evidence’ the phone maker is developing own power management chip
Dialog Semiconductor risks losing a crucial supply deal with Apple, according to an analyst who cut his rating on the stock on Tuesday, sending the AngloGerman chip maker’s shares down by as much as one-third.
Bankhaus Lampe, a private bank, reduced its rating on Dialog to sell from hold, saying Apple was working on its own battery-saving chip for the iPhone, which could replace Dialog’s power management integrated circuits as early as 2019. Apple accounted for more than 70% of Dialog’s 2016 sales, analysts estimate.
The German company says it is the world’s top maker of power-management chips used in smartphones, with roughly 20% of the market.
Shares in Dialog fell as much as 36% on Tuesday. They more than doubled in the second half of 2016 on rising expectations for the iPhone 8 due out later in 2017. By late morning, they had halved their losses to trade down 19% at €37.70.
Apple’s suppliers are in the spotlight after Imagination Technologies last week revealed Apple’s plans to replace its graphics chips with parts it is developing in-house, sending shudders through Apple’s global supply chain. Imagination’s stock plunged 70%.
Bankhaus Lampe cited unnamed industry sources as saying that Apple was setting up power-management design centres in Munich and California and said Apple already had about 80 engineers working on a power-management chip of its own.
“In our view, there is strong evidence that Apple is developing its own [chip] and intends to replace the chip made by Dialog, at least in part,” Bankhaus Lampe analyst Karsten Iltgen said in reference to power management chips.
Iltgen is a four-star rated analyst for the accuracy of his earnings estimates on Dialog and ranks sixth among 16 analysts covering the stock, according to Thomson Reuters data.
A source familiar with the matter confirmed that Apple was recruiting top Dialog engineers in Munich, saying: “They are poaching like crazy.”
A Dialog spokesman declined to comment. He also said Dialog was not planning any official statement. Apple did not immediately respond to a Reuters request to comment.
A trader with brokerage Exane, who said he had been in contact with Dialog management, said investors were overreacting. He said Dialog had completed designs for chips that Apple planned to use in 2017 and 2018 iPhone models, while it continued to discuss with Apple using its parts in 2019 phones.
The trader also said Apple would need to hire more than 1,000 engineers to completely replace the power-management chips supplied by Dialog.
The downside of winning Apple as a customer is that smaller suppliers can become highly dependent on its business because of the huge sales volumes generated by new iPhone contracts. Dialog has made several attempts to diversify beyond Apple and other smartphone customers in the past few years.
In 2014, merger talks between Dialog and Austrian sensor chip maker Ams fell apart after they failed to come to terms. Its plans to buy US-based Atmel in 2015 were derailed after Microchip swooped in with a higher bid.
Apple has outsourced production of its hardware products to an extended network of suppliers, large and small, while it has moved over the past decade to design its own central processors and added functions like fingerprint recognition.
Over the past dozen years, Apple suppliers CSR, PortalPlayer, Sigmatel and Wolfson have been replaced, eventually pushing them to merge with more diversified players.
APPLE WOULD NEED TO HIRE MORE THAN 1,000 ENGINEERS TO COMPLETELY REPLACE THE POWER MANAGEMENT CHIPS
But Apple continues to rely on key suppliers to develop innovations ranging from image and motion sensors to power management. Other chip suppliers for the current iPhone 7 include, but are not limited to, Cirrus Logic, NXP, Qualcomm, Skyworks and STMicroelectronics, according to an analysis by TechInsights in September.
Shares in highly diversified chip maker STMicro, which analysts believe supplies light sensors for iPhones, fell 2.5% in Paris on Tuesday and weighed on the benchmark STOXX Europe 600 technology index.