On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.
Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.
According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.
The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start. Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August. Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.
What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage. The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.
Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.
As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India.
Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models. The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.
These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.
Then again, Apple continues to be rated by Gartner as the number one supply chain.