Last week global consumer electronics developer Apple reported record breaking financial performance for the company’s fiscal 2021 first quarter that ended December 26, 2020.  Since this was the all-important holiday quarter which typically contributes upwards of 30 percent of annual sales volumes, Apple’s supplier ecosystem was especially tuned in.

Among financial highlights were:

Total revenues of $111.4 billion, up 21 percent on a year-over-year basis and establishing an all-time high quarterly sales record. What should be of special interest to Supply Chain Matters readers is that international sales accounted for 64 percent of the quarter’s revenue, an indication that non-U.S. markets continue to be a notable influence for the company’s sales growth volume.

Profitability for this recent quarter was billed as the most profitable ever, reported as $28.8 billion, an increase of 29 percent. Generated operating cash flow amounted to $38.8 billion, while $30 billion was returned to shareholders during the quarter. Is it no wonder that this company is the darling of the global investment community?  CFO Luca Maestri provided comments of double-digit growth in each product category.

CEO Tim Cook praised the tireless efforts and innovative work of all Apple team members and indicated to business media that the company could not be more optimistic about the company’s existing product line-up.

Apple iPhone 12 supply chain challenges

Operational Performance

The highly anticipated Apple iPhone 12 product line-up featuring 5G network support for the first time, was delayed by the initial outbreak of the COVID-19 coronavirus across China. In our Supply Chain Matters blog published in mid-October of 2020, we noted that the planning and managing of iPhone product demand involved five different models. The refresh design of the lower cost, 4.7-inch model iPhone SE was announced in the direct shadows of the pandemic’s effect back in March, and the consumer electronics provider added the four new iPhone 12 models, at separate price points, and in four different color choices. Equity analysts were at the time, joyous of the company’s broad pricing strategy designed to attract multiple consumer segments. Yet, the supply chain planning aspects were complex with many variables.

Apple’s sales and operations planning, and supply chain management teams obviously raised to the challenge for making-up for the delayed launch and still supporting stellar product availability and sales volumes.

In mid-November, Supply Chain Matters highlighted various reports of supply shortages related to power consumption control chips which were especially important to the 5G models that utilize higher power needs. Other reports pointed to a shortage of Lidar components used for depth-sensing imaging functions for both the iPhone 12 and new iPad models. That shortage reportedly resulted in the allocation of some components intended for iPad production, reportedly involving the production of upwards of two million new iPads.  A Nikkei report at the time also reported indications that the company had placed robust orders for older iPhone models to try to make-up for shortages in the new 5G lineup. That reportedly included supplemental orders for more than 20 million of iPhone 11, iPhone SE and iPhone XR smartphones to be available from October thru the end of this year’s holiday buying period. An executive level source indicated to Nikkei that sales momentum for the iPhone 11 remained exceptionally strong at that time.

Revenues of iPhones reportedly rose 17 percent to $65.6 billion in the December ended quarter. In its reporting, The Wall Street Journal cited data from Consumer Intelligence Research Partners that indicated that the average U.S. price of the iPhone rose to $873 from $809 a year ago, with the indication that customers gravitated toward the more expensive models. Apple does not share detailed unit sales volumes and thus only the company’s sales and operations teams know the actual breakdowns.

There also appears to be mixed reaction as to whether the attraction of 5G enabled phones primarily fueled the holiday focused sales growth or whether consumers opted to upgrade their existing phones alone.

CEO Cook did indicate to investors that while iPhone 12 supply should be in balance for the new quarter, he is not as optimistic about iPad supply being resolved this quarter. We speculate that the re-allocation efforts of the power consumption chip have been a spillover to the now existing quarter.

 

Labor Unrest

The other notable challenge within Apple’s operational performance were the headlines related to worker riots at the Wistron iPhone assembly facility near Bangalore India, and the citing of contract manufacturer Pegatron after discovering labor violations regarding student worker programs at production campuses in Shanghai and Kunshan in Eastern China. The Wistron India incident was reportedly resolved by an admission by local company management of communication dis-connects that would be righted. Pegatron was reportedly placed on probation by Apple for the student worker violations.

Most troubling was a late December report published by The Washington Post and highlighted in Supply Chain Matters which cited findings from human rights group Tech Transparency Project, that accused the Apple supplier of utilizing forced Muslim labor in its factories according to documents uncovered by and shared exclusively with the labor rights group and the Washington Post publication. This report indicated that the revelation added new scrutiny to Apple’s human rights record in China.

Each of these reports provided yet another stream of revelations regarding the company’s enforcement and ongoing auditing of published supplier code-of-conduct policies.

From our lens, the headlines for just completing its most profitable quarter ever will only increase such scrutiny on component and manufacturing suppliers as well as Apple’s determination to hold suppliers accountable.

 

Indeed, the recent holiday quarter was a boom to Apple as well as its key suppliers. Bloomberg recently reported that both Hon Hai Precision (also known as Foxconn technology) beat quarterly revenue expectations while chipmaker Dialog Semiconductor increased its revenue forecasts due to stronger market demand for 5G enabled smartphones and tablets.

 

Bob Ferrari

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