The Growing Perils of Being an Apple (AAPL) iPhone Supplier

Companies compete hard to be an Apple Inc. (NASDAQ:AAPL) iPhone supplier. Winning a contract to supply iPhone components can be a big deal — after all, AAPL sold more than 210 million finished devices last year alone. But there’s a dark side to being a a link in the iPhone supply chain.

Apple AAPL stock

Because Apple boasts the highest profit margins in the business, the company is always squeezing suppliers for lower prices. And if a component is deemed critical to the iPhone’s success, AAPL may take it in-house. In just the past several weeks, three suppliers have learned their iPhone business is at risk, with reports that Apple may move to designing their components itself.

The latest to be singled out is Synaptics, Incorporated (NASDAQ:SYNA), maker of the iPhone’s display driver chip.

Companies Go to Great Lengths to be an Apple Supplier

There are dozens of primary components that make up an iPhone and hundreds of smaller bits, from screws to camera lenses. With the kind of volume an AAPL order offers, companies are willing to go to great lengths to win a contract to produce iPhone components.

For example, last year Samsung Electronics (OTCMKTS:SSNLF) was reportedly spending $6.82 billion to expand its OLED production capacity by 50% in order to meet the volume AAPL will need for iPhone 8 displays.

British chipmaker Imagination Tech. (OTCMKTS:IGNMF) saw its stock increase nearly 1,500% in three and a half years after signing a 2008 deal to design a graphics chip for AAPL’s iPhone. Its business as an Apple supplier now generates more than half of Imagination’s total revenue.

Supplying iPhone Components Can be Risky Business

Being an Apple supplier is not without risk, and recently it’s become even more so.

Some companies implode under AAPL’s demands. GT Advanced Technologies Inc (OTCMKTS:GTATQ) is a classic example of this problem. Tapped to produce sapphire glass for the iPhone, the company signed a $578 million dollar contract with Apple in 2013. Under pressure to rapidly expand its operations and unable to meet Apple’s aggressive demands, GTAT was forced into bankruptcy by 2014.

The problem that’s been in the headlines over the past several weeks is AAPL bringing key iPhone components in-house, even if that means leaving a long-time Apple supplier hanging. This strategy stems from a combination of cost-cutting, guaranteeing supply and quality, and giving Apple full control over key iPhone components so it can customize them at will.

Remember Imagination Technologies? Despite AAPL being an investor in the company and a nearly decade-long relationship, it was announced a few weeks ago that Apple is moving to in-house design of its iPhone graphics chips. Faced with the prospect of over half of its revenue evaporating within several years time, Imagination Technologies stock was battered.

That’s been followed in quick succession by two more Apple supplier relationships that analysts predict are in danger of suffering the same fate.

On April 11, Dialog Semiconductor PLC stock dropped 30% after reports AAPL was working on its own iPhone power management chip to replace Dialog’s. Then a Credit Suisse analyst singled out Synaptics as being at risk. Besides giving Apple the ability optimize iPhone power and performance with its own chip, 9to5Mac points out another reason Synaptic is could be in trouble. In 2015 — just a month after AAPL introduced 3D Touch on the iPhone 6s — Synaptic announced it would release similar force-sensing touchscreen controllers for competing Android smartphones.

Of course, none of this in-house logic should catch any Apple supplier by surprise. After all, the iPhone has always been built around Apple’s own custom-designed AX processors instead of the Qualcomm, Inc. (NASDAQ:QCOM) CPUs that most smartphones use. And as Apple continues its relentless march toward preserving margins and pushing for iPhone capabilities that are beyond what Android smartphones can pull off, expect more iPhone components to come in-house and more AAPL suppliers to see their business disappear.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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