Apple suppliers have few tools to defy gravity

Himax Technologies

03/01/2019 14:27

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Liam Proud
    LONDON, Jan 3 (Reuters Breakingviews) - Apple’s  AAPL.O  
iPhone is losing its sheen. That’s worse news for some
chipmakers than the cash-rich giant whose logo adorns the
world’s most recognisable handset.
    Chief Executive Tim Cook on Wednesday blamed a sales warning
on slower Chinese growth, and also cited problems in developed
markets including less-generous carrier subsidies. Apple’s
shares fell 7 percent in aftermarket trading, and there were
bigger drops on Thursday in some of its European suppliers.
Austria’s AMS  AMS.VI , which makes face-recognition sensors,
fell 20 percent; power-chip maker Dialog Semiconductor  DLGS.DE 
 was down 9 percent.
    That disparity is logical. Apple has more tools to soften
the blow than many of the companies that manufacture iPhone
parts. First is a net cash pile worth $130 billion, which Cook
hopes to get rid of over time. Further stock buybacks could
appease income-hungry investors. Second, its 805 million active
iPhones – on Loup Ventures’ count – are stuffed with software
including the App Store, Apple Music and Apple Pay. These
services can help Cook grow revenue. He could also use the
iPhone’s ubiquity to promote newer products like watches or
smart home speakers. 
    European chipmakers like $1.6 billion AMS and $1.7 billion
Dialog are in a worse position. The companies rely on Apple for
40 percent and 75 percent of sales respectively according to
Credit Suisse. One response to slow iPhone sales is to diversify
by selling to Apple rivals like Samsung  005930.KS   or Huawei.
But that will be costly and could easily fail if Asian
competitors such as Himax Technologies  HIMX.O   or AAC
Technologies  2018.HK   are quicker to win contracts. Moreover,
diversifying might do little to help since the global smartphone
market has been shrinking for over a year.
    Another option is to push into new fields like sensors for
self-driving cars or chips for everyday objects - the so-called
Internet of things. Yet AMS has limited room to invest given its
net debt is worth almost three times EBITDA on Refinitiv data,
and neither group is an R&D behemoth. Besides, the new
technologies may flop or take years to generate revenue.
Chipmakers have limited means to defy the gravity of falling
Apple iPhone sales.
    On Twitter https://twitter.com/liamwardproud
    
    CONTEXT NEWS
    - Apple on Jan. 2 said it expected to make $84 billion of
revenue in the three months ending Dec. 29, around 8 percent
less than previous guidance had suggested. The main reason was
an economic deceleration in China, Chief Executive Tim Cook said
in a letter to investors that was published after the market had
closed. 
    - Europe-based Apple suppliers AMS, Dialog Semiconductor and
STMicroelectronics were down 21 percent, 6 percent and 6 percent
respectively at 0920 GMT on Jan. 3.
    - Apple said lower iPhone revenue, mostly from China,
accounted for all the revenue shortfall relative to its earlier
guidance. Apple shares fell around 7 percent in aftermarket
trading shortly after the statement. 
    - For previous columns by the author, Reuters customers can
click on  PROUD/ 
    - SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Apple warning shakes European shares as chipmakers tumble    
 urn:newsml:reuters.com:*:nL8N1Z30S1
Apple cuts sales forecast as China sales weaken; iPhone pricing
in focus     urn:newsml:reuters.com:*:nL3N1Z236Y
Apple statement    https://www.apple.com/newsroom/2019/01/letter-from-tim-cook-to-apple-investors/
BREAKINGVIEWS-Apple sales warning is a Chinese joint venture   
 urn:newsml:reuters.com:*:nL1N1Z21IA
BREAKINGVIEWS-Apple’s pricey strategy carries risk   
 urn:newsml:reuters.com:*:nL2N1XC1XL
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Swaha Pattanaik and Karen Kwok)
 ((liam.proud@thomsonreuters.com; Reuters Messaging:
liam.ward-proud.thomsonreuters.com@reuters.net))