It is that time of the year again, one which has become rather predictable for Apple’s supply chain ecosystem. Every year in the September-November time period, the world anticipates Apple’s announcements of its newest products including the all critical iPhone.
September triggers other external industry actions as well that reflect on what may be occurring across the company’s supply chain.
Apple has established a predictable pattern for announcing its new products in the September-November period, and the consumer giant’s loyal followers are patterned to anticipate such announcements in-time for Q4 holiday gratification. Every other year, Apple’s new product announcements typically include a compelling hardware revamp.
However, patterning and predictability has allowed Apple’s principal competitors such as Samsung, Huawei Technologies, Xiomi and others to move their new product announcements to occur mid-year, prior to Apple, in-essence scooping Apple in marketing features and function buzz.
We have longed praised Apple’s public relations and marketing teams for the superb job they do in building-up the hype interest related to Apple’s newest products. Every September, not only do social media channels buzz with comments related to what may be announced in the latest iteration of iPhone, in this year’s case, the iPhone7, but also the usual rumors of supply chain challenges that may hinder consumers in getting one’s hands on the newest phone by the holidays.
This week was no exception with Apple’s iPhone7 announcement, only this time, Apple’s PR teams have what appears to be a greater challenge of convincing existing iPhone owners of the compelling need to upgrade to the newest model. Already, the initial buzz seems to be that Apple has not included enough compelling evidence to warrant a new upgrade purchase. Then again, there are always those that have to get their hands on the latest iPhone model.
The new iPhone7 and iPhone7 Plus models were announced with longer battery life, sharper screens and long awaited larger storage, but alas, the elimination of the headphone jack has captured most of the initial social commentary. The jack was eliminated to make the newest model thinner and allow for more waterproofing. Instead of the traditional plug-in jack, Apple has introduced AirPods, wireless headphones that are designed around a wireless microprocessor that can be obtained for a mere $159. According to a report from today’s edition of The Wall Street Journal, technophiles in China have affectionately dubbed the new AirPods as hair dryers.
For customers in the all-important China region, it would appear that the new features and functions can be garnered from competitor manufacturers at less cost.
This week’s iPhone7 announcement schedule was far more aggressive. Orders for the new model will begin shipping on September 16 for 28 countries, up from an initial 12 countries for last year’s iPhone6 launch.
Supply Chain Ramp-Up and Sourcing
August and September are when Apple’s component suppliers and contract manufacturers ramp-up volume production to build inventories for the all-important holiday fulfillment quarter. Multitudes of temporary workers are brought on-board, and select Asian country production and inventory activity indices predictably spike in Q3/Q4 to reflect the Apple wave. This year, as is in past years, rumors are prevalent about production ramp-up challenges, lower than expected production yields and other supply challenges. Most are directed as the new dual-lens camera feature.
Earlier this month, the WSJ reported that as Apple grapples with subsequent quarters of declining iPhone sales, the consumer electronics icon began an effort in January to once-again cut better supplier deals, However the latest development is the double whammy of cutting prices as well as setting lower volume expectations with component suppliers and contract manufacturers, threatening to further impact various supplier financial performance. According to the report, suppliers are wary about the lack of a smash hit and the demands from Apple for additional discounts is not sitting well. Foxconn, one of Apple’s largest and most trusted contract manufacturers has seen its operating margin slip from 3.4 percent to 2.3 percent in Q2. Other Q1 and Q2 financial performance results from various key Apple suppliers reflect weakening results and increasing operating margin stress,
No doubt, Apple will be closely monitoring weekly fulfillment results and will dynamically adjust supply requirements. Suppliers will be expected to respond and conform to any required changes either up or down in nature.
Social Responsibility Concerns Continue
Also every September, social responsibility watchdog China Labor Watch, reports on its latest findings of alleged labor abuses involving Apple’s major suppliers. This year is no exception, with the watchdog group again focusing on reported abuses involving contract manufacturer Pegatron. Readers may recall that in 2015, Apple further segmented its supply chain with the addition of Pegatron as a supplemental, lower-cost contract manufacturer.
In a report published in late August, the labor watchdog analyzed over 12 months of payroll statements from select Pegatron workers. This latest report concludes that while the average wage rates in China have steadily increased, contract manufacturer worker wages decreased significantly in the past 8 months from a series of payroll practice changes along with added worker deductions. The report further points to the occurrence of excessive overtime work particularly occurring during production ramp-up periods. The China Watch analysis of 2015 pay statements concludes that 62 percent of Pegatron workers worked over 82 hours of overtime per month, and that factory workers continue to be forced to work overtime hours. The labor watchdog group indicates that it has shared its findings with Apple.
In fairness to Apple, labor conditions across China’s consumer electronics sectors are not just common to Apple. China Labor Watch has issued similar concerns regarding Samsung’s China based suppliers as well as other manufacturers, which reflect a continual environment of accepted or tolerated labor abuses. At least Apple is willing to put more effort and broader visibility to its social responsibility expectations and audit practices.
Thus, the Apple supply chain enters another Q3-Q4 period of expected performance and miracle-making but with far more uncertainties related to the financial fortunes for being an Apple supplier. Meanwhile, Apple itself seems to be protecting its high operating margins and the potential expense of a more volatile supply chain.
This will indeed be an interesting subsequent period of the new iPhone and other newer Apple product models. Apple’s influence and clout remain open to challengers. If you had thoughts that your firm or organization’s sales and operations planning (S&OP) was continually challenged and constantly changing, think perhaps of Apple.
Bob Ferrari
