After a prior $64 billion plunge in market value, Apple reported its financial performance for the March-ending quarter, and investors now seemed very pleased. Pleasure was garnered not only for the bottom-line results, but also in Apple’s announcement related to a significant $100 billion stock repurchase and added dividends plan.

Supply Chain Matters is of the view that the latest fiscal quarterly results represent a significant strategy inflection point for Apple’s hardware product supply chains. 

Apple posted quarterly revenues of $61.1 billion, an increase of 16 percent from the year-ago quarter. Operating income was reported as $15.9 billion, an increase of 14 percent from the year-earlier period.  Nearly 60 percent of total revenues now emanate from outside of the Americas geography.

Quarterly revenues related to Apple’s iPhone line-up reportedly rose 14 percent to $38 billion. That number was significant in the light of the fact that shipment volumes had only increased 3 percent in the March-ending quarter. Higher-margin and features  are now the predominant iPhone product strategy.

One other important financial metric is overall revenue generated from services. In its latest fiscal year, the consumer electronics giant generated $30 billion in services related revenues, an increase of 23 percent. In the March-ending quarter, services revenues were reported as $9.2 billion, growing at a 31 percent annual clip.

Reporting on the financial results, The Wall Street Journal made a significant statement related to transformation:

The results for Apple’s fiscal second quarter reflect a fundamental transformation reshaping the world’s most valuable company, turning a business centered on how many devices it ships into one built around high-end features and services for those devices.

 

Product and Consequent Supply Chain Strategy Implications

Since 2013, this supply chain industry analyst has long commented on Apple’s changing supply chain strategies. The iPhone supply chain was manifested by a series of segmentation strategies, varying from a supply chain increasingly supporting premium, high-margin consumer devices and one supporting high-volume, lower-cost, lower-margin consumer devices.

As many senior supply chain executives and their teams are all too aware, there are distinct differences in the requirements between a high-volume, high-margin global supply chain strategy vs. a higher-volume, much lower-margin one that must cater to the unique channel distribution requirements of emerging markets. That principle looms large when the bulk of existing market demand comes from emerging markets in developing regions.

Hardware Supporting Services

The real purpose of the iPhone was not only to support growing global market demand, but to establish a foundation for add-on, higher-margin content services.  There is now growing evidence that the global smartphone market, except for certain emerging regions, is reaching a maturity stage. Within emerging regions such as China, India and other countries, the notions of a smartphone are in bare-bones functionality, and cost remains a key consumer determinant. Reflection that trend, Xiaomi, one of China’s best-known smartphone brands is preparing an IPO which calls for a shifting of business strategy directed towards being more of a provider of software and services, and less about purely hardware. The new reality is that smartphone unit growth and margins are on the downswing.

According to the Morgan Stanley, there are now 1.3 billion active iPhones and other devices generating an average $30 in services revenue per device. The financial services firm now anticipates that services will account of 60 percent of Apple’s revenues over the next five years.

The Transformational Shift is Now Occurring

Apple’s supply chain capabilities have in many tests, provided the agility and resiliency to enable explosive business growth. Suppliers were conditioned to expect multiple product changes, at multiple times, and were further expected to be able to ramp-up rather quickly to be able to reap the benefits of participating in explosive unit volume growth.

This author now believes that 2018 will represent another inflection point in Apple’s supply chain strategy, one that moves away from supporting higher hardware unit volumes with lower-margin production to one that will support a premium line of high-margin hardware devices. Such a supply chain strategy closely links hardware and software product innovation, new product development and advanced production capabilities.

In short, Apple’s unfolding strategy is to claim and hold the premium end of the market, allowing hardware devices to not only contribute healthy margins, but also fuel higher levels of services and content revenues.

Apple’s prior presence as the globe’s most watched supply chain has reached a peak, at least for now. If Apple elects down the road to enter other product hardware markets, the visibility will invariably return.

Implications

The implications on existing Apple suppliers and contract manufacturers are rather significant, especially those that have relied on high unit volumes and scale to garner profitability. Hardware unit volumes for Apple would seem to have reached their peak. As we highlighted in our prior Apple related commentary, major suppliers are already dealing with the implications.

Implications for geo-political global trade policy shifts loom large as-well. With the U.S. and China currently at-odds over intellectual property and trade imbalance practices, Apple’s China-intensive manufacturing strategies are likely a very sensitive topic. That could well up-end Apple’s supply chain and production strategy if a trade war were to ensue. The current distancing of product design and manufacturing remains concerning. CEO Tim Cook and his supply chain leadership team may well be paying much closer attention to geo-political trade trends since they can up-end the shifting of business strategies.

 

Bob Ferrari

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