Apple Supplier Learns Downside of Living at Juggernaut's Mercy

(Bloomberg) -- Inside every iPhone and iPad are dozens of small components made by suppliers whose businesses are tied to Apple Inc. As Imagination Technologies Group Plc has now learned, it's lucrative to be a favorite Apple supplier -- until you're not.

Apple notified Imagination that it will no longer be using the British company's graphics technology within the next two years. The news Monday sent Imagination's shares down as much as 72 percent. Apple is Imagination's largest customer, providing just over half its revenue.

Just as a household product's success can be determined by Wal-Mart Stores Inc., the fate of component suppliers around the world are often based on the product decisions of Apple engineers and executives. With about 211.9 million iPhones sold last year, Apple's scale gives it considerable leverage over suppliers. Sixteen companies receive at least half their revenue from Apple, including Cirrus Logic Inc and Hon Hai Precision Industry Co Ltd., according to data compiled by Bloomberg.

Imagination has long been one of Apple's closest suppliers. Its graphics technology has been inside every iPhone and iPad released, allowing for things such as playing games. In 2008, Apple began building what's now an 8 percent stake in Imagination. 

The partnership has been a financial boon for the chip supplier, whose revenue has more than tripled since the iPhone was first released in 2007. Imagination even has an office near Apple's headquarters in Cupertino, California, so its engineers can work more closely with Apple. The two companies held talks last year about combining, but a deal the didn't come together.

Apple has recently hired several people from Imagination, including former chief operating officer John Metcalfe as a senior director based in London.

Now Imagination says Apple plans to make the graphics technology on its own. The U.K. company said it was negotiating with Apple, but Imagination's stock still collapsed. Neil Campling, head of technology research at Northern Trust Securities, said Imagination is now "uninvestable." Roger Phillips, an analyst at Investec Ltd., said it was Imagination's "biggest risk realized."

The news spooked investors of other Apple suppliers. Dialog Semiconductor Plc., a U.K.-based chipmaker that gets about 69 percent of its sales from Apple, fell as much as 4.4 percent Monday, the most since December, according to data from Bloomberg.

Apple has a history of being touchy with suppliers. In one current spat, Apple has sued chip supplier Qualcomm Inc. over the royalty it pays for cellular technologies used in modems for the iPhone and iPad. Apple and Samsung Electronics Co., which is a supplier for Apple in addition to being its biggest competitor, were entangled in patent lawsuits for years. 

Other suppliers such as touch-screen maker TPK Holdings and audio-component maker Audience have also seen their stocks whipsaw based on orders from Apple. GT Advanced Technologies, which Apple hired to make a new kind of screen glass, filed for bankruptcy after Apple abandoned the project.

"It is both a boon and a bane to have Apple as a customer," said Neil Shah, research director at Counterpoint Technology Market Research.

--With assistance from Giles Turner

To contact the reporter on this story: Adam Satariano in London at asatariano1@bloomberg.net.

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Anthony Palazzo