Thu, Apr 20, 2017 - Page 12 News List

Apple ensures its suppliers remain on the cutting edge

Bloomberg

Imagination Technologies Group PLC discovered how fickle life can be as an Apple Inc supplier when it was ditched this month by the iPhone maker.

More suppliers might 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 PLC, Synaptics Inc and Cirrus Logic Inc are particularly vulnerable to Apple’s supply chain whims and demands, analysts have said.

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 in recent years stepped up in-house design of components, including graphics, Bluetooth and other smartphone-related chips. That is 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. However, last year alone, one in five US chipmakers were acquired, Susquehanna Financial Group data showed.

Key Apple suppliers SanDisk Corp, Broadcom Corp, TriQuint Semiconductor Inc, Intersil Corp, Sharp Corp, Elpida Memory Inc, RF Micro Devices Inc and Fairchild Semiconductor International Inc have all been snapped up since 2013.

This year is particularly important for Apple, because it is 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.

Apple was last year in acquisition talks with Imagination Technologies. The Kings Langley, England-based company designs a type of chip called a graphics processing unit that has been 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.

On April 3, Imagination said Apple would stop using its graphics technology after developing its own solutions.

The British company lost about two-thirds of its market value that day.

In the past five years, Apple doubled research and development spending as a percentage of revenue, an increase chief financial officer Luca Maestri attributed to new product categories and developing more of its own underlying technology, among other factors.

Semiconductor research is among the most expensive in the technology industry, often exceeding 18 percent of revenue. Apple spends 4.7 percent of its income on research and development, up from 2.2 percent in 2012.

The payoff from the investment could be substantial.

Semiconductors account for about one-third of iPhone manufacturing costs, Cowen & Co analyst Timothy Arcuri said.

Meanwhile, tapering growth of smartphone sales has heightened the need to squeeze every last dollar of profit out of the handsets that Apple does sell.

The main risk is that Apple misses new technology trends that bubble up through a large supply chain. Relying more on internally created components, it will have fewer suppliers lining up to show it the latest innovations.

Then there is the risk that some partners decide they do not want to deal with Apple anymore.

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