The manufacturing and supply chain challenges related to Apple’s new iPhone X (ten) have now taken a toll on the consumer electronics producer’s most-valued contract manufacturer.

Foxconn, also known as Hon Hai Precision reported a 39 percent decline in Q3 profitability principally attributed to unplanned idle labor capacity and production timing at its factories designated to produce the tenth anniversary model iPhone.

Readers will recall that Apple designated Foxconn to be the sole contract manufacturer because of technology and component complexities involved in the premium model. For that matter, Foxconn has always served as the go-to when Apple introduces a new model that features added technological complexities.

Third quarter margins reportedly sank to a four-year low of 5.8 percent, well below analyst’s and market expectations that were in the seven percent range. News of the Q3 financial performance sent shares of the contract manufacturer’s stock down 2.8 percent in Taiwan.

The iPhone X production challenges seem to be somewhat stabilized but there remain indications of 3-4 weeks of backlogs in shipments to U.S. based customers. Apple CEO Tim Cook indicated in his company’s recent financial performance briefing that production of the iPhone X is “going well.”  Cook also acknowledged that forecasting product demand for all four of the currently available iPhone models being offered has been challenging.  The delay of over one month in actual iPhone X availability has obviously complicated overall supply chain and production planning.

The latest estimates from analyst firm Yuanta Securities peg Q4 production levels of the premium model iPhone now at 28 million units vs. the original plan of upwards of 40 million units for the crucial holiday fulfillment quarter.

In its coverage, The Wall Street Journal noted that Foxconn was not the only Apple contract manufacturer incurring financial setbacks because of production bottlenecks. Pegatron, assembler of the iPhone 8 models indicated a 32 percent drop on net profit in financial results reported last week.  Analysts interpreted the profit shortfall to component shortages and labor issues.

The implication of these latest financial developments among Apple’s select contract manufacturers is added evidence to the notions that increased complexity in iPhone product design and functionality spill over to production setbacks and bottlenecks, which, in-turn, impact the bottom lines of suppliers and contract manufacturers. The open question is whether Apple makes its CMS partners whole with such challenges, or whether this remains the cost of business for being a prime Apple supplier.

As we have observed in many prior commentaries, being an Apple supplier affords opportunities for large volumes of business, production output and opportunities for broader supply chain component integration. But, at the same time, as global competition continues to intensify in the global smartphone market, suppliers need to ensure that the customer portfolio is one of balanced financial and technological risk.

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