‘Don’t depend on Apple’ is the tech mantra of the month

Another one bites the dust. German-listed Dialog Semiconductor Plc lost one-third of its market value at one point after analysts at Bankhaus Lampe KG claimed there was “strong evidence” that Apple Inc. was working on making its own power management chips for the iPhone.
Dialog replied that it knew of “no business reason” for the share price movement. But if there is anything in the Bankhaus claims, it would mean Apple might one day buy fewer of its chips. Not ideal for a company that relies on the world’s most profitable smartphone maker for 70 percent of sales. Despite the analysts’ careful admission that they cannot be sure when or even if the shift will occur, investors panicked. The shares did recover lost ground later in the day, but were still 14 percent lower by late afternoon.
By now this pattern should be familiar. As I wrote last week, Apple mints riches at its suppliers by buying components en masse, but reduces them to rubble when it leaves them. British chip designer Imagination Technologies Group Plc warned investors that Apple planned to wean itself off its graphics processor chip designs within two years. The result: Imagination shed two-thirds of its market value in a matter of hours.
Dialog shows up near the top of a screen of companies most exposed to Apple, with only Cirrus Logic Inc., a maker of audio components, and a small Hong Kong-based firm more dependent on the California giant. According to Bloomberg, there are about a dozen companies that get at least half their revenue from Apple, including large contract manufacturer Foxconn.
Investors with long memories will recall other examples of Apple suppliers suffering terribly after being cut off, including Wolfson, CSR, and Sigmatel.
Dialog has been here too. A decade ago, it was very reliant on Ericsson AB for sales, and before that Siemens AG. To some extent, this is the lot of component makers. Investors should probably apply a steep discount to companies so dependent on the whims of one customer. But sometimes the Apple euphoria wins out.
Dialog’s management has been talking about diversifying its customer base for ages. It tried to buy chipmaker Atmel last year but was outbid. It may want to think about other deals pretty quickly. Dialog can afford to buy given its strong free cash flow but would need to hold off on the share buybacks. Independence costs.
Even if Apple did take more chip design in-house, Dialog will still have 1,200 engineers who can be redeployed on products for other smartphone makers. Their brainpower won’t disappear overnight, which should offer some support to the share price. Barclays analyst Andrew Gardiner says it’ll be harder for Apple to displace Dialog than its other suppliers because of a shortage of engineering talent in power management.
That said, Apple’s desire to make more of its own chips won’t go away. And its ambitions may be bigger than outsiders appreciated. Having control over its graphics processor designs and power management chips makes sense given that they’re central to any high-end smartphone. Apple must continuously justify its higher prices.
Everyone in the Apple supply chain should adjust to the new reality,
and fast.
— Bloomberg