The life of an Apple supplier is getting even tougher
Cost isn’t the only incentive for Apple to develop its own components. It also helps the company couple its hardware more seamlessly with its software.
Imagination Technologies Group discovered how fickle life can be as an Apple supplier when it was ditched this month by the iPhone maker.
More suppliers may suffer the same fate as the world’s largest technology company faces a shrinking number of semiconductor makers and expands into areas that need special chips designed in-house.
Dialog Semiconductor, Synaptics and Cirrus Logic are particularly vulnerable to Apple’s supply chain whims and demands, according to analysts. One component supplier, Avnet Inc., stopped working with Apple because the relationship was squeezing its profit margins too much.
Apple has developed its own processors for years, but has stepped up in-house design of components, including graphics, Bluetooth and other smartphone-related chips, in recent years. That’s expensive, and creates new risks, but it helps the company maintain leverage over suppliers as a recent wave of acquisitions cut the number of chipmakers it works with.
To secure cheaper prices, Apple likes to have at least two suppliers for any given component. But last year alone, one in five U.S. chipmakers were acquired, according to Susquehanna Financial Group. Key Apple suppliers SanDisk Corp., Broadcom, TriQuint Semiconductor, Intersil Corp., Sharp Corp., Elpida Memory Inc., RF Micro Devices Inc. and Fairchild Semiconductor International have all been snapped up since 2013.
Loop Capital Markets analyst Betsy Van Hees, has seen 35 chip companies swallowed since 2014. “You have less competition, less pricing pressure,” she said. “Which may be why Apple is going more internally than externally.”
In the past, it was easier for Apple to squeeze outside suppliers to improve profit margins, she added.
This year is particularly important for Apple because it’s preparing to launch three iPhones, including a flagship device with a major new design. The installation of new manufacturing lines and processes is costly, so Apple needs to find savings elsewhere.
“To avoid taking a hit you put some pressure” on the suppliers, BGC Partners analyst Colin Gillis said.
Cost isn’t the only incentive for Apple to develop its own components. It also helps the company couple its hardware more seamlessly with its software, Chief Financial Officer Luca Maestri explained at a Feb. 14 conference in San Francisco. “We have better control over timing, over cost, over quality,” he said.
Expansion into new markets and products may also require hardware unique to Apple’s needs that isn’t immediately available from outside suppliers. The AirPods Bluetooth headphones, released last year, use low-energy communications chips that Apple got through its purchase of Passif Semiconductor Corp. in 2013. In 2012, Apple spent $356 million acquiring AuthenTec Inc., which had fingerprint sensors and related chipsets that helped build the fingerprint scanner on the iPhone.
Apple was in acquisition talks last year with Imagination Technologies. The Kings Langley, Englandbased company designs a type of chip called a graphics processing unit that’s used in iPhones and iPads, and analysts theorized Apple wanted to take the technology in house and push it forward on its own terms. Apple decided against making an offer.
Then, on April 3, Imagination said Apple would stop using its graphics technology after developing its own solutions. Apple also hired several employees from Imagination, including former Chief Operating Officer John Metcalfe.
The British company lost about two-thirds of its market value that day. On Wednesday, UBS estimated Apple will pay Imagination onethird of its current royalty rate as their relationship winds down over the next two years.