Apple stock is in a current tailspin after the company reported its best quarterly financial performance in its history. With a concern and focus on whether the company’s future iPhone’s strategy will be lower volume, higher margin hardware and related services generated margins, the implication for supply network segmentation and supplier relationship strategies remain concerning. 

Background

Since 2013, this independent supply chain industry analyst had long commented on Apple’s changing supply chain strategies but had elected to cut-back on that activity in early May of this year. After Apple shared its March-ending Fiscal Q2 quarterly financial results, I declared via Supply Chain Matters what we believed was a turning point for supply chain strategy.

After a prior $64 billion plunge in market value, the consumer electronics icon had posted $61 billion in quarterly revenues along with $16 billion in profits, an increase of 14 percent over the year-ago period. Quarterly shipment volume related to the iPhone were significant in the light of the fact that shipment volumes had only increased 3 percent in the March-ending quarter. Further announced was a significant $100 billion stock repurchase and added dividends plan for existing shareholders.

All of that motivated us to declare that higher-margin features were now going to be the predominant iPhone product strategy, with the significant mass of installed phones serving as the basis of lot of recurring content and services revenue growth into the future.  With growing evidence that the global smartphone market, except for certain emerging regions, is reaching a maturity stage, it seemed to us that Apple was staking on strategy on owning the premium end of the market.

Morgan Stanley had declared in a research report there were 1.3 billion active iPhones and other devices generating an average $30 in services revenue per device. The financial services firm had opined that recurring services revenues would account of 60 percent of Apple’s revenues over the next five years.

Thus, came our declaration that 2018 represents the beginning of an inflection point in Apple’s supply chain strategy, one that moves away from supporting higher hardware unit volumes with lower-margin iPhones 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.  Therefore, Apple’s prior presence as the globe’s most watched supply chain had literally a peak, at least for now. If Apple elects down the road to enter other product hardware markets, the visibility will invariably return.

 

Latest Quarterly Results

Apple posted Fiscal Q4 financial performance results last week that generally surpassed Wall Street’s expectations with a 20 percent year-on-year increase in quarterly earnings and a 41 percent increase in earnings-per-share. Services revenues reached an all-time high of $10 billion in the latest quarter. Apple CEO Tim Cook declared the quarter the strongest revenue and earnings performance in the company’s history.

All of that great news was apparently not what caught Wall Street’s attention, instead what all equity analysts were fixated on was Apple’s forecasts of future iPhone related unit shipments along with an announced decision to omit model unit outputs numbers in future reporting.

As of this morning, Apple stock has undergone two successive rounds of analyst downgrades. On Friday, the company posted its fifth consecutive week of stock loses, closing down 6.6 percent at the end of Friday, characterized as the worst one-day move since January 2014.

 

Apple Supply Network Implications

As we indicated in May, the implications on existing Apple suppliers and contract manufacturers remain rather significant, especially those that have relied on a hardware-based strategy of high unit volumes and scale to garner profitability. Apple’s strategy to hold the premium smartphone segment while leveraging higher margin services content revenues has the company’s hardware focused supply network in a transitionary state. It further has implications for impacting the existing supply chain segmentation strategy that has lower-volume, high profitability differentiated from higher-volume, lower-margin hardware output.

A further reinforcement came in September with Apple’s annual formal launch of new iPhone models just before the critical end-of-year holiday fulfillment quarter. This year, Apple prioritized development and production ramp-up of its priciest models initially, that being the iPhone XS and XS Max whose retail prices start at $1000. Product announcements and ramp-up related to the lower-priced new iPhone models come later. That strategy led The Wall Street Journal to conclude that a one-month staggered relief allowed Apple a month to sell the higher-margin models, in-essence without lower-end competition from its own product line. That is the reverse of what occurred last year when the iPhone X model incurred an overall one-month customer shipment availability because of a host of manufacturing glitches. Apple’s holiday quarter performance was instead the result of sales of the lower-priced models in high volumes.

Apple’s latest unit sales forecast is likely the result of this new product release strategy and a test of whether existing iPhone users prefer to upgrade to the priciest model or lower-priced models this holiday period.

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 more rounds of aggressive import tariffs 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.

Apple’s supply network partners have surfed successive waves of garnering profits from high unit volumes and maximum agility to Apple constant demands in pushing the envelope in production design and complexity.

This latest inflection point has consequences for long-term financial planning for many of Apple’s key supply network partners.

 

Takeaway

Coupled with these ongoing developments are stepped-up effort in addressing what has to be tense supplier relationships that are becoming more concerned that financial fortunes cannot be pinned to Apple alone. The consumer electronics icon may succeed in owning the lower-volume, high-end of the premium smartphone or broader consumer electronic product segments.  But many of its key suppliers and contract manufacturers, and particularly its segmented high-volume supply network participants, have pinned their fortunes on high unit volume growth to amortize required product and process innovation needs.

The same inflection point that is now becoming ever more visible has an obvious cascading financial and investment impact across Apple’s supply network, both in the current quarter and in future quarters.

 

Bob Ferrari

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