If you are a close follower of Apple, or even if you are not, one cannot avoid this week’s large-scale coverage related to the announcement of the company’s latest fiscal June ending quarterly earnings. The business media bylines are numerous:

Only the second time in 39 quarters the company reported results that missed analyst’s profit and revenue expectations”- The Wall Street Journal

“Apple is the world’s most valuable company, and the earnings miss was only the second time in 10 years.”- The Associated Press

“Today’s Apple Earnings are All About the iPhone” – Bloomberg Businessweek

Beneath the many bylines are results that many a company will envy these days, but unfortunately contrasted to previous spectacular results:

  • Over a 22 percent increase in total quarterly revenues to $35 billion, with 62 percent originating from international sales. (down 59 percent from previous quarter)
  • Profits up over 20 percent to $8.8 billion (down 94 percent from previous quarter)
  • Gross margin increased to 42.8 percent from previous 41.7 percent

Much of these financial results, in many respects, is not at all dire, but portends warning signs.  One of the most significant warning signs is increasing competition in the markets where Apple competes.

We will leave readers to search out all the various financial implications in business media and instead will focus this Supply Chain Matters commentary to a supply chain lens view of what these latest Apple results might indicate.

Our first byline is: Apple’s latest results provide some breathing space for Apple’s supply chain.

The past months and weeks have provided many published information leaks emanating from various supply chain sources indicating difficulties in supporting order volumes for the newly released iPad, labor shortages and production ramp-up issues associated with the assembly of the new Mac computers, and ramp-ups of the new iPhone and iPad models. Consider the fact that Apple shipped 26 million iPhones, 17 million iPads, 4 million Mac computers, 6.8 million iPods and 1.3 million Apple TV devices. At the same time, suppliers are working on production ramp-up of the anticipated new iPhone and iPad models along with who knows what else.  Reports indicate that certain suppliers are aggressively investing in expanded capacity, including added component production in the U.S.

Last, but not at all least is the fact that Apple has chosen to pick an intellectual property battle with one of its highest profile component suppliers, Samsung, which supplies a custom ARM processor and according to data estimates from IHS iSuppli, over 12 percent of the iPhone’s bill of materials, not to mention other products including LCD displays. Signs point to Apple’s procurement teams beginning to add alternative sources of supply to buffer any impacts related to Samsung.

That is a lot of stress to place on any global supply chain, with little margin for error, and a slowdown in activity should, in our view, provide some needed breathing room.

Another obvious need for breathing room is fixing ongoing remedial actions as a result of the recent audits related to labor and worker safety practices at supplier facilities in Asia, being overseen by the Fair Labor Standards Association.

On the topic of information leaks: Apple’s supply chain information leaks have backfired

The Apple senior management and consensus Wall Street view appears to be that the company missed expectations because consumers are holding out for the new version of the iPhone due later this year. Yet, at the same time, Apple’s social-media juggernaut has been hyping all sorts of information leaks speculating on what features and components to look for in the new version. Is it any wonder that consumers are holding back?

However, the other reality is that arch rival Samsung has already scooped Apple in its new market release of the Galaxy phone which now has a time-to-market advantage.  Two months after market release are reports of over 10 million new Galaxy phones sold and component shortages limiting order fulfillment needs. Our speculation is that Apple’s PR and marketing wizards are encouraging information leaks related to the new iPhone model to blunt Samsung’s current market momentum.

Apple suppliers will unfortunately find themselves as the scapegoat of information leaks while the marketing gods leverage leaks to blunt the market.

To continue its rate of growth, Apple has to modify its product and supporting global supply chain strategy on-the-fly

There are two important factors brought out in the latest results.  The first is that Apple’s revenues are weighted heavily on international markets. The second is that the rising value of the U.S. dollar, compounded by the slowing of the economies of Europe and China, are having a discernible impact on Apple current revenue growth momentum.

We have previously penned commentaries providing our view that Apple is developing lower-cost versions of its popular devices because the company must target a more cost-sensitive consumer who cannot currently afford the high price tags of Apple’s products. Not everyone in the world can afford a $200- 300 subsidized iPhone or $500 iPad. Once more, Apple’s real goal is securing the largest volume of installed base devices upon which it can sell more profitable electronic content. Reuters just released information from a recent unsealed statement from an Apple expert witness filed in the current patent law suite against Samsung indicting that between October 2010 and March 2012, Apple encountered gross margins of 49 to 58 percent for the iPhone. An entry version of either the iPhone or iPad targeted to income challenged consumers implies different product structure, selling channels, and supply chain design. Apple is facing the challenge of having to segment its supply chains to support both existing high margin, and soon, high-volume, very low-margin products, all while adhering to a looking glass of high social responsibility and labor practice standards.  Do not be surprised that some of Apple’s huge cash balance is being tapped for increased production robotics and supply chain automation.


The bottom line is that Apple’s supply chain capabilities have in many tests, provided the agility and resiliency to enable explosive business growth. The third fiscal 2012 quarter for Apple is the turning point for even more challenges for its supply chain ecosystem.

A final postscript as we post this commentary to the web.  Samsung just announced that its fiscal second-quarter profit set another company record by rising 48 percent.  The company attributed much of that profit growth to increased sales to the recent launch of the new Galaxy smartphone.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.