Apple's Squeeze on LG Innotek Profits Puts Company at Risk
Apple is LG Innotek's largest client. LG Innotek is under the LG Corporation umbrella. LG Innotek has become increasingly vulnerable to the so-called 'Apple risk' as Apple is pulling back orders from LG. LG's reliance on Apple has put the company in a dire situation and the banks are telling clients to sell LG Innotek stock. Losing LG Innotek as a supplier can't be good for Apple in the long term either. Whether LG can resolve their reliance on Apple in time, or Apple ease up on their demands for heavy price cuts is unknown at this time.
While LG Innotek has shown robust performance in the first half of the year, they're most likely to see a profit squeeze due to falling profit margins caused by Apple's reduction of purchases of Innotek's products.
A European Bank manager stated that "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." He stressed the bank advised its clients to sell Innotek shares, citing such business uncertainties.
Innotek offers liquid crystal display (LCD) modules, digital tuners, motors, protection circuit modules, power and wireless modules and radio frequency (RF) components for companies operating in mobile, display, network and car electronics markets.
One cited analyst stated that "Innotek knows its Apple business can't generate the profit that it wants. The irony is that they can't depart from Apple." LG Innotek has openly admitted that it is concerned about the Apple risk.
An unnamed Innotek official stated that Apple "is looking to source parts other than Innotek." The impact of the 'Apple effect' will be short-lived but it is not good. No imminent breakthroughs are in sight and the company's top management has no power to push restructuring plans. That's why questions still remain about the company's long-term corporate sustainability.
On the flip side, Apple has to remain competitive to fight off competition in the smartphone and tablet business sectors. LG Innotek has played an important role in supplying Apple with quality displays. Yet late last week we reported that LG is a second tier display supplier for the iPhone 5S and third tier supplier for the iPhone 5C. Whether Apple will be able to boost component orders to LG to assist their bottom line going forward is unknown at this time.
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