Apple Slashes iPhone Production, Unleashing Supplier Turmoil

Just three months ago, the world celebrated was celebrating Apple’s achievement of a historic milestone: becoming the first company in the world to reach a $1 trillion market capitalization.

Now, after an unimpressive product launch and poor Q3 earnings report in which the company quietly revealed its controversial decision to stop breaking out sales unit numbers for iPhones, the narrative surrounding the company’s stock has changed remarkably and, as Lumentum shareholders no doubt remember, difficulties associated with lackluster sales of the three new iPhone models are trickling down to Apple’s beholden suppliers, who were the first to hint at the trouble in paradise by cutting their guidance due to declining demand at their biggest customer(s), an obvious reference to Apple.

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Smelling blood in the water, Goldman Sachs slashed its price target to $209 from $222 (based on a P/E of ~16x), citing expectations of slowing demand in emerging markets – and China in particular, where Baidu searches for the new iPhone modes (a surprisingly accurate leading indicator for demand) have fallen dramatically (though this isn’t all that surprising considering the outrageous prices of the new phones, coupled with a weakening currency that is making Apple products more expensive in yuan terms).

And one week after shares of Apple suppliers imploded following Apple’s latest earnings report (while Apple shares tumbled into bear market territory, erasing $200 billion in value from their October highs), the Wall Street Journal has published a deep dive into the reactions of Apple’s long-suffering suppliers, who were willing to countenance the company’s controlling style and its inflexible demands while sales were hot. But as Apple’s complex three-tiered product offerings create logistical nightmares and the company’s expensive handsets start turning off some customers, suppliers are beginning to rebel. In the past, Apple thrived on “the beauty of simplicity,” said,” said one executive at an Apple supplier. “It was very few models at massive volumes.”

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With the company’s latest generation of phones, that has changed. And according to WSJ, over the past three weeks, Apple has slashed production orders ahead of the crucial holiday sales season, leaving at least three of the company’s largest suppliers – Lumentum, Qorvo and Japan Display – with unused production capacity and inventory, and hinting at more turmoil ahead.

Lower-than-expected demand for Apple Inc.’s new iPhones and the company’s decision to offer more models have created turmoil along its supply chain and made it harder to predict the number of components and handsets it needs, people familiar with the situation say.

In recent weeks, Apple slashed production orders for all three of the iPhone models that it unveiled in September, these people said, frustrating executives at Apple suppliers as well as workers who assemble the handsets and their components.

Forecasts have been especially problematic in the case of the iPhone XR. Around late October, Apple slashed its production plan by up to a third of the approximately 70 million units it had asked some suppliers to produce between September and February, people familiar with the matter said.

And in the past week, Apple told several suppliers that it cut its production plan again for the iPhone XR, some of the people said Monday, as Apple battles a maturing smartphone market and stiff competition from Chinese producers.

Apple declined to comment.

During an interview earlier this year with The Wall Street Journal, Apple Chief Financial Officer Luca Maestri said that trying to determine demand for its devices based on reports from suppliers can be misleading because the suppliers also make products for competitors.

At Foxconn, Apple’s largest supplier (which is famously building a factory in Wisconsin that it’s hoping to staff with Chinese workers) some workers are voluntarily cutting their shifts. Some are questioning Apple’s decision to raise prices on some phones to $1,000 and above, while also choosing to sell older models in stores. While Apple is hoping to compensate for slowing sales with higher revenues, since peaking in fiscal 2015, the number of iPhones sold annually has fallen 6% to 217.7 million units.

“The more choice you introduce, the harder it is to pinpoint who will buy what,” said Steven Haines, chief executive of Sequent Learning Networks, which has advised companies such as FedEx Corp. and Verizon Communications Inc. on product management.

And while Apple reported its largest-ever annual revenue for the fiscal year ended in September, investors and analysts have proven again and again that the unit sales figures are paramount. This goes doubly for the company’s suppliers, because while companies like Lumentum were willing to put up with Apple’s domineering tendencies as long as yoy comps were growing, now that they’re not, some are starting to question aspects of this relationship that they had previously taken for granted.

Apple has offset slowing growth by raising iPhone prices and focusing more on software and services. The strategy helped the company report its best-ever year of revenue and profit for the fiscal year ended in September; for the current quarter, it projects revenue of $89 billion to $93 billion. Its growing services business has also offset the company’s contracting hardware margins, industry analysts say.

But while Apple has been enjoying record revenue and profit for the past year, the same can’t be said for many of its suppliers. That is because unlike Apple, they can’t benefit from services and software and they rely heavily on handset volumes, suppliers and analysts say.

“The freeway of Apple suppliers is littered with roadkill,” said Timothy Arcuri, an analyst with the investment bank UBS who tracks the iPhone supply chain. “That’s one thing when units are growing and another when units aren’t going to grow. There’s an argument to be made now: Why take the risk?”

Ultimately, a supplier rebellion could create huge headaches for Apple by further eroding the company’s bottom line if these suppliers decide that they shouldn’t be so amenable to Apple’s demands when the iPhone maker has consistently treated their relationship more like a privilege than an economic necessity.  In summary, with Apple hiding its iPhone sales numbers for reasons that should be obvious to all…

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…Expect to see more headlines like this one “Does Apple’s Sales Slump Mean The Company Has Finally Peaked?”.

via RSS https://ift.tt/2KiSOfm Tyler Durden

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