Apple Supplier Learns Downside of Having a Very Big Client

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

Apple notified Imagination that it will no longer be using the British company’s graphics technology within the next two years. The news 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, 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 and Hon Hai.

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 COO 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 their stocks still collapsed. The news have also spooked investors of other Apple suppliers.