Smartphone camera and component manufacturer LG Innotek is facing increasing pressure as a result of the success of its largest client, Apple, according to Korean press reports.
Increasing cost pressure from Apple is making the company increasingly dependent on its next largest customer, LG Electronics.
According to one senior fund manager at a Europe-based investment bank quoted by the Korean Times, the success of the iPhone has given Apple leverage to tighten margins from its suppliers.
“Innotek has ‘client’ problems. It’s been generating revenue by selling its components to LG Electronics and Apple. But the margin is very thin. If Innotek fails to add new customers, then its position will fall to a ‘second-tier’ parts supplier,” the report said.
“The problem is Apple is asking Innotek to supply camera modules with heavy discounts, which the firm can’t refuse as they want to be recognized as one of Apple’s trusted suppliers.
“Innotek knows its Apple business can’t generate the profit that it wants. The irony is it can’t depart from Apple.”
The situation has been made more difficult for the firm by Apple’s attempts to diversify its supply base, especially as the company attempts to shake its dependency on another key rival, Samsung.
After Apple entered the mobile phone market in 2007, Samsung became a major supplier of a range of essential components including memory chips, batteries, displays and processors.
However, relations between the two companies had cooled significantly by late 2012, with Samsung overtaking Apple as the world’s largest smartphone vendor by unit shipments.
Apple, in turn, filed a series of patent violation lawsuits against Samsung, with a $US1 billion payment being awarded to Apple in a high-profile case, along with an attempt to get key Samsung products banned from sale in the US.
This has led Apple to examine switching its orders for memory chips, displays and processors away from Samsung, with Samsung Display recently cancelling a major LCD display contract with Apple. Apple had hoped that Taiwanese semiconductor firm Taiwan Semiconductor Manufacturing Company (TSMC) would be able to replace Samsung as a processor supplier.