Since the bulk of the article is behind the paywall, see below the break….
A key supplier to Apple Inc.
said Wednesday it is shipping “far fewer” new iPhones than the
Cupertino, Calif. company has requested, because some quality standards
still can’t be met due to design-related production difficulties.
Supply-chain
problems have led to a long wait for the iPhone 5 since the device’s
late-September launch, analysts said. The scarcity of the phones has
been weighing on Apple’s share price as well, as investors are concerned
Apple may not be able to meet consumer demand in the near future,
weighing on its earnings
“Market demand is very strong, but we just can’t really fulfill Apple’s requests,” Taipei-based Hon Hai Precision Industry Co.
Chairman Terry Gou told reporters on the sidelines of a local economic forum.
Mr. Gou declined to say which of the
phone’s design features has caused production issues and how long it
will take for those issues to be solved. He also refused to comment if
Hon Hai plans to outsource some of the iPhone orders to other makers, or
to its Hong Kong-listed subsidiary Foxconn International Holdings Ltd.
as some analysts suggested last week.
Apple sold more than 5
million new iPhones in just three days after its Sept. 21 launch. The
company hasn’t given another update since then.iPhone sales have been driving the company’s
earnings. For the quarter ended Sept. 29, Apple reported a profit of
$8.22 billion, up 24% from a year earlier. It sold 26.9 million iPhones
in the period, up 58% from a year earlier. Peter Oppenheimer, Apple’s
Chief Financial Officer, said on Oct. 25 that demand for the iPhone 5
continued to outstrip supply, but it was working hard to catch up.
Hon Hai, the world’s largest contract electronics maker by revenue,
is based in Taiwan with factories across China. The company goes by the
trade name Foxconn Technology Group
and assembles many Apple products including the new iPhone and iPad.
Hon Hai also makes electronic products for many of the world’s brands
including Hewlett-Packard Co.,
Sony Corp.
and Amazon.com Inc.
Mr. Gou said Hon Hai is hiring 1.3 million people in China,
making it one of the biggest employers in the country. A spate of
factory suicides since 2009 and outbreaks of unrest at its factories
have brought Hon Hai under scrutiny for its labor practices in recent
years.
Some labor-rights groups have said stricter quality control on the
iPhone 5 has put more pressure on production-line workers in China. Mr.
Gou also said Wednesday he was in China a few days ago to give moral
support to workers there.
One can take a glass half-full or glass half-empty view on the above. My take is that Apple’s pushing of the design envelope, coupled with the challenge of trying to mass produce such products, will inevitably lead to this tipping point in trying to meet the exacting quality standards demanded by Apple. It results in a catch-22 where additional investments are needed on the manufacturing side as well as compensating workers who are tasked with assembling those components which aren’t fully automated. The end result is increased production costs which impacts the profit margins. Raising prices of the product is not the solution though since Apple would raise the risk of a consumer revolt. Likewise, taking a hit on margins will impact the price of the stock even further.
In many respects, it is better to have a supply problem as opposed to too much supply that no one wants. Yet, Apple’s continued ability to not meet demand risks leaving sales on the table which can be taken up by the competition (putting marketshare in further peril). Why continue leaving that door open? I’m not advocating that Apple burn through its cash hoard as a means to fully solving the dilemma of trying to build quality products in the quantities needed to meet demand. However, continual investment is needed on the manufacturing side especially for the portions of the process where automation is proving to be a challenge. Going forward, the logistical challenge that Apple needs to do a better job on is insuring an adequate supply to meet not just the initial demand, but to also have enough inventory ramped to sell through the channel for the at least 3-4 weeks.
Furthermore, Apple’s continued obsession with making things even thinner will only increase these manufacturing challenges. One can say is the price of success where the expectations end up becoming unrealistic and unpractical. The end result is that no matter how good the sales, revenues, and profit margins are, it is never good enough (from a Wall Street perspective). And then the expectations are set even higher for the next product launch. As a long term shareholder, the current declines in share price are nothing new. But I have to admit that seeing this now widely held stock being so easily manipulated on numerous occasions, to where it can move 20+% to the downside, is becoming annoying. Sure, it presents these buying opportunities which has been exceptionally rewarding over the long haul. But I’m also not ignorant to the fact that all it takes is one major execution mishap to send this thing down even more quickly while taking many quarters to recover.
In the meantime, I’m looking at what I can liquidate so that I have additional ammo…
