Financial headlines this week are keenly focused on a building decline in technology stocks being led by Apple and its perceived shifting of iPhone product and hardware supply network strategy impacts.

Background

Earlier this month, Supply Chain Matters updated our readers on Apple’s Fiscal Q4 financial performance and product strategy implications and to what believed was a reinforcement that this global consumer electronics icon was indeed shifting the company’s product strategy. That strategy is one that focuses on owning the premium end of the smartphone market while leveraging over one billion of currently installed mobile devices as a literal piggybank of annual recurring services and content-based revenue growth.

We indicated in May that the strategy shift has context to supply network implications on existing Apple suppliers and contract manufacturers.  They remain rather significant for hardware focused suppliers, especially those that have relied on a strategy of high unit volumes and scale to garner profitability. Apple’s emerging new strategy to hold the premium smartphone segment while sacrificing volume has the effect of placing company’s the hardware focused supply network in a transitionary state. It further has implications for impacting the existing supply chain segmentation strategy that has differentiated lower-volume, high profitability from higher-volume, lower-margin hardware output.

Since the company’s report of stellar Fiscal Q4 financial performance, Apple’s stock has undergone two successive rounds of analyst downgrades.

Added Developments

More evidence of supply network concern were reflected this week.

Nikkei Asian Review reported last week that Apple has requested its Asian based suppliers and contract manufacturers not to expand production capacity for the newer, recently announced and lower priced iPhone XR model.

In addition, three of Apple’s suppliers, Lumentum Holdings, Japan Display, Qorvo, have each scaled back revenue expectations for the coming year. While each has not explicitly indicated that forecasted revenue shortfalls relate to iPhone production cutbacks, nor specifically identified Apple as a key customer, Wall Street analysts obviously have a full picture of the Apple hardware supply network.

In a published report by The Wall Street Journal, the opening paragraph told it all:

“Apple Inc. may not want to talk about iPhone sales anymore. That leaves the company’s massive global supply chain to do the talking for them.”

The second development is what is described as this week’s added selloff of Apple shares into what is being headlined as “bear territory.” As of this writing, shares have now declined 20 percent from their record high peak achieved in October. In its reporting, Business Network CNBC provides a quote from one prominent equity analyst indicating:

“It’s like Tim Cook opened up Pandora’s Box by pulling the unit metrics on iPhone shipments, As there’s less transparency in the story, investors have feared that Apple’s trying to hide decelerating unit growth. When you see general nervousness across the tech space, combined with expectations that Apple was going to carry the weight of the FANG names … it’s kind of been a perfect storm.”

 

Other Unknowns

Not mentioned thus far in business media reporting are the potential impacts of the escalating trade war involving China and the United States. Implications for geo-political global trade policy shifts continue to loom large as-well for unit shipment volumes over the next 2-3 quarters.

If the Trump Administration follows through with its threats for yet another $245 billion round of aggressive import tariffs relative to components and finished high-tech products from China, Apple’s China-intensive manufacturing strategies will likely remain the hostage or the victim. Apple’s $1000 plus iPhones run the risk of draining consumer pocket’s even higher.

Perhaps CEO Cook is not being given full consideration for hedging future smartphone output expectations because of the implications of added tariffs that may be both import and export related.

What Does it Imply

One of the globe’s most closely watched supply chain remains will remain under an intense looking glass.

The adage that unfavorable supply chain news directly leads to declines in a company’s stock price is once again unfolding for one of the globe’s most admired consumer electronics designers.  Months from now, we can look back to ascertain whether November 2018 was the date when investors truly began to adsorb a discernable change in Apple’s product and hardware supply network strategy, or whether the company’s senior management had foreseen that geo-political events warranted executing this change.

Bob Ferrari