Apple Supplier Dialog Falls on Report of In-House Chip Move

(Bloomberg) -- Apple Inc. is designing its own power-management chips for use in iPhones from as early as 2018, reducing its dependence on Dialog Semiconductor Plc, Japan's Nikkei reported, without identifying its sources. The report sent Dialog plunging the most in almost eight months.

Such chips handle charging and power-management functions in smartphones, and U.K.-based Dialog relies on Apple for about three-quarters of its revenue. The Nikkei said that “based on Apple's current plan,” it would replace potentially as much as half of the power management chips that go into the iPhones starting next year with its own design. These chips are one of the most crucial and costly components after core processors, modems and memory chips.

Dialog shares fell as much as 23 percent to 28.53 euros in Germany.

“The level of visibility into the design cycle of our leading customers remains unchanged and the business relationships are in line with the normal course of business,” Dialog said Thursday in an email. An Apple spokesman in Europe declined to comment.

In-House

While Apple has developed its own processors for years, the company has stepped up in-house design of components, including graphics, Bluetooth and other smartphone-related chips, recently. That's expensive, and creates new risks, but helps the company maintain leverage over suppliers as a recent wave of acquisitions cut the number of chipmakers it works with.

By designing its own chips, Apple can also better integrate hardware and software and distinguish its phones from those by rivals like Samsung Electronics Co. It would also enable Apple to better compete as it develops emerging technologies like artificial intelligence.

More suppliers may suffer similar fates as the world's largest technology company expands into areas that need special chips. Along with Dialog, Synaptics Inc. and Cirrus Logic Inc. have been mentioned by analysts as being particularly vulnerable to Apple's supply chain whims and demands.

In 2008, Apple purchased PA Semi, a Silicon Valley-based chip startup that designed high-performance, low-power microprocessors. As a result, two years later Apple debuted the iPhone 4, which was powered by the company's first custom chip, the Apple A4.

Imagination Folds

The A4 was based on the design of an ARM Holdings microprocessor, but incorporated graphics technology developed by Imagination Technologies Group Plc. Earlier this year, Apple cut ties with Imagination after years using the U.K. company's products for the iPhone, iPad and other products, in favor of developing its own graphics technology. Imagination ultimately agreed to be acquired by a Chinese-backed private equity firm.

In April, Karsten Iltgen, an analyst at Bankhaus Lampe, warned that Apple would probably cut back on the use of Dialog's power-management chips but noted that a shift to Apple developing its own chips in-house is unlikely in the short term. Dialog's stock dropped as much as 36 percent on the news that day, the biggest intraday decline since Dec. 18, 2000.

Robin Brass, an analyst at Hauck & Aufhäuser, also said Thursday that he thinks it's unlikely Apple will already replace Dialog's chips with its own by 2018. "I can imagine that this will happen, but not as fast," Brass said in an interview.

Bloomberg Intelligence analyst Woo Jin Ho said the next generation of the iPhone should still use Dialog power management chips, but after that, as the Nikkei report suggests, Apple may go in-house.

--With assistance from Stefan Nicola

To contact the reporter on this story: Nate Lanxon in London at nlanxon@bloomberg.net.

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Molly Schuetz, Bruce Rule

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