Apple Shows Where Supply Chain Power Lies – Imagination Technologies Shares Crash

Power.

You can talk about lots of important words when it comes to the commercial and business arrangements between buyer and supplier. You can talk relationships, and collaboration is a good word. Negotiation perhaps would be high on the list.

But the most important word to remember is POWER. However you dress up the buyer / supplier dynamics in nice words, you can’t forget or lose sight of that basic underpinning factor.

If we needed reminding of that, Apple highlighted the truth well last week. The firm has had a long-standing and quite probably amicable relationship for many years with Imagination Technologies, a UK based firm who produce and supply chip technology to Apple. But last week, out of the blue (to the external world anyway), Apple announced that they would develop their own technology and within two years would stop buying from Imagination. As the FT reported,

Apple, which has used Imagination’s chip technology in its iPhones, iPads, and iPods under a licensing agreement, told the Hertfordshire-based company that it was “working on a separate, independent graphics design in order to control its products and will be reducing its future reliance on Imagination’s technology”,

The effect was sudden and dramatic. Shares in Imagination lost an astonishing 72% of their value literally overnight. They have recovered a little since but are still less than half their previous value.  Now Imagination disputes whether Apple would be able to develop its own designs without infringing the Imagination copyright and intellectual property rights, but there is no way of knowing how true that is – but don’t under-estimate Apple, we suggest.

There are several possibilities here;

  1. Apple are signalling a genuine intent to reduce dependence on an important supplier, and have made a particular and no doubt well thought-out make / buy decision – a legitimate supply chain tactic and response of course.
  2. Apple already owns 8% of Imagination and may be looking to acquire more or even buy the firm. How better to depress the share price and point out to Imagination and to potential outside investors (who might try and push up any acquisition price) just how much the firm depends on Apple.
  3. Apple is looking in reality to continue the Imagination relationship, but wants a better deal. This is all a negotiation tactic.

It will become clearer which of these is the accurate diagnosis, but in any case, this demonstrates how Apple is using its market power to dictate terms to its supplier. We don’t know exactly how much of Imagination’s revenues come from Apple but some sources say it could be as much as half. Clearly, that is a risky situation, and makes the firm vulnerable to the buyer using their power.

So by all means talk about collaboration and relationships, but above all, analyse the power in your value and supply chain situations. Even if there aren’t any easy answers, understanding the situation is a good starting point. And if you are new to this topic, you could start here…  and then read lots more of Professor Cox’s work!

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