For Apple, the deemed most valuable listed company for Wall Street investors, anything written about the company, especially downbeat, draws many eyeballs.
Today’s front page article published in The Wall Street Journal, Apple Cuts Orders for iPhone Parts As Demand Slips, is no exception.(paid subscription or free metered view). The article summarizes reports from insider sources (most likely Apple suppliers) that indicate that orders for iPhone 5 LCD screens have dropped to “roughly half of what the company had previously planned to order.” Apple allegedly notified of the supply cutback in December. The WSJ concludes in its report that this development indicates that sales of the latest iPhone have been not as strong as previously forecasted due to stronger market competition. As expected, the story had a downward impact for Apple’s stock.
Supply Chain Matters is of the view that one should not jump to business conclusions on the basis of a downward adjustment in Q1 product forecasts. For consumer electronics, Q4 and the associated holiday buying surge is the classic peak period for supply chain fulfillment, especially for Apple. Most all of the company’s new product launches are indeed strategically timed to build pipeline demand for the Q4 end of calendar year period when consumers are inclined to spend on lavish gifts. OEM’s can have a blowout Q4, but it can come at the cost of eroding previously forecasted Q1 demand. The report that the downward adjustment was communicated in December, we believe, is more a reflection of responsive supply chain planning.
In the particular case of LCD screens for the iPhone 5, Apple had purposely contracted with three different suppliers because of initial manufacturing yield challenges on the new layered screen design. The company shifted requirements for display technology to in-cell technology, combining the touch and panel layers in a single design. Reports from various Asia based business media outlets during the last six months have noted initial difficulties in securing high production yields with this new technology. Supplier Sharp was especially challenged to meet volume production requirements because of its severe financial difficulties, which have since been alleviated by a cash investment from Qualcomm. A downward adjustment in LCD supply may be acknowledgement of increased production yields along with the need to cut back on this contingency supply plan. For its part, Apple has again wisely elected to not comment.
Supply chain component needs expand and contract with any quarter, a reality of today’s demand-driven supply chain management practices. Thus, we tend to not draw any significant conclusions from the latest reported production cutbacks.
If on the other hand, Apple continues on a trend of subsequent quarterly contractions in supply requirements for the remainder of 2013, than that would be more newsworthy.