This specific Supply Chain Matters blog shines light on Apple, and the company’s global consumer electronics iPhone demand and supplier networks, our once most favored supply chain network to write about.

We use the past tense since for some time now, when Apple shifted is business growth strategy toward leveraging the iPhone installed base toward added content and subscription services to fuel for the bulk of revenue and profitability growth, The notions of Supply Chains do Matter in enabling business strategy did not, from our lens, seem to be evident to peak our readers interest. Alas, in the throws of the COVID-19 coronavirus pandemic, a far different picture and set of challenges present themselves. Apple's Procurement Leadership

When the initial news that the virus spread from its epicenter in the city of Wuhan, to broader provinces of China, leading to the country-wide lockdown mandates, international media was abuzz about the specific impacts to Apple and the company’s planned new product introductions this year. While this blog echoed some of the sentiments of the news cycle, we did not bite. (excuse the apple pun)

We, instead, elected to wait until the country resumed post COVID business operations to observe what strategies the iPhone maker would pursue.

Indeed, the playbooks our being executed and it now appears that the consumer electronic icon will once again leverage this company’s clout and supplier influences to successfully achieve the annual model refresh plan to introduce a total of four different new models of smartphones this year, three of which will initially debut 5G connectivity and usage.

For all of those Apple cult followers out there, hang on to your bonnets since this strategy looks to push many of the boundaries of supply chain risk and customer fulfillment management.

 

The Details

For the past two weeks, Asian and U.S. based traditional and social media outlets have each been resonating as to what The Wall Street Journal reported as: “…forging ahead with plans to release four new iPhones models later this year, people familiar with its plans say.”  The other headline was the report of a one-month pushback of production ramp-up of the flagship premium models scheduled for introduction in September.

Each of the phones varies in consumer targets and technology connectivity, and plans call for the traditional mid-September unveiling with market availability following by the end of September. Separately, the refresh of the newest entry 4.7-inch model iPhone SE has been recently announced for online availability in the direct shadows of the pandemic’s effect on the China supply network.

The company has already pre-warned investors on missed revenue projections in the current quarter because of supplier and final assembly disruptions related to existing models in the market.

Other Asia based reports citing supplier sources indicate that the company has communicated to suppliers as much as a 20 percent reduction in production needs for the second-half of this year, leading to speculation of either known development and production delays, or Apple adjusting expectations of global product demand given the significant economic shocks occurring across the globe.

Apple loyalists might well recall the 2017 introduction of the iPhone X, where actual availability slipped from September to November as a result of subsequent production glitches. Contract manufacturer Foxconn was forced to report a 39 percent decline in Q3-2017 profitability principally attributed to unplanned idle labor capacity and production timing at its factories designated to produce the tenth anniversary model. In that same Q4 2017 period, Apple had initially forecasted the need for upwards of 40 million units for the crucial holiday fulfillment quarter, and actual demand turned out to be closer to 28 million units.

Not many suppliers are that flexible, especially in the current very uncertain COVID-19  impacted global economy.

Once again, the burning question is how many consumers, despite their loyalty to Apple, will be willing or able to shell out upwards of $700 to $1000 plus for a new iPhone?

The Journal report notes that upwards of two-thirds of high-end iPhone sales originate in Europe and the U.S., with both now hit hard by the effects of the virus on employment and economic conditions not seen for decades. As of this week, 30 million Americans have filed for government unemployment benefits.

Some Apple watchers have opined that the company may hold-off on releasing the newer more expensive models until demand or the global economy picks up again, which is anyone’s guess.

 

Product Management and Supply Chain Challenges

The WSJ report indicates that Apple engineers cannot fly to China at this point, because of work at home restrictions. Thus, engineering verification processes are limited to remote operations, and any problems with the factory are taking more time than under normal circumstances. As global economies begin to gradually open over the coming weeks or months, international air travel will present significant challenges requiring many to likely to continue with online based meetings.

As this blog has indicated in prior high tech and consumer electronics focused advisories, component disruptions and subsequent supply shortages continue to ripple up and down supply networks. While Apple has undoubtedly huge clout and influence with suppliers and contract manufacturers, COVID-19 may or may not turn out to be a different force.

Regarding the planned September release, the WSJ indicated the prime contract manufacturing services provider Foxconn has halted hiring at the main iPhone assembly facility in Zhengzhou. The Financial Times reported that the Zhengzhou facility was cutting staff.

Least we further mention that unlike 2017, the air freight, air lift and global transportation capabilities are expected to be far different than that of 2017. The risk of volume production extending to October and November will likely require creative solutions for expedited movement of finished iPhones.

Finally, we add the ongoing geo-political tensions specifically involving China and the U.S. with the recent tariff escalations and now, the notions and aftereffects of COVID-19 adding to more tensions, as well as consumer buying loyalties. Our latest blog highlighting Foxconn’s entry into semiconductor vale-chain will likely add to these backdrop tensions as Apple navigate the political tightrope.

 

The Takeaway

Once again we can alert our readers that Apple’s product management and supply chain aggressiveness culture seems alive and well, willing to test what others may be reluctant to do.

While the report card of previous efforts is mostly good; added product complexity and multiple new product introductions have shown vulnerabilities, and now warrants continued observation.

Let us observe how Apple responds in the coming months.

Bob Ferrari

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