Suppliers Squeezed as Apple Cuts Components Orders

Apple Inc. (Nasdaq: AAPL) has reportedly drastically scaled down orders for components from suppliers as the company faces increased competition from rival Samsung Electronics Co. Ltd. (Korea: SEC). Apple has also trimmed its forecast for the sales of iPhone 5 in response to lower-than-expected demand, according to a report by The Wall Street Journal.

If confirmed (Apple itself doesn't announce or comment on such decisions), the move could heavily impact several of the company's leading suppliers, many of which produce custom components for Apple. Suppliers that could be immediately impacted are display vendors like Sharp, Japan Display Co. and LG Display, The Wall Street Journal said.

The report would seem to back up current speculations in the market that the competition is clawing back market share lost when Apple introduced its first iPhone in 2007. Rivals have already clipped Apple's once overwhelming dominance in the smartphone market: The company's share price, according to IDC, fell to 14.6 percent in the third quarter of 2012 from as high as 23 percent in the last quarter of 2011.

Samsung, which has attacked the segment with a wide range of offerings -- including its latest product, the Galaxy S111 -- has since become the market leader. Its share of the market rose to 31.3 percent in the third quarter of 2012 from just under 9 percent two years previously.

Apple has even recently been handed a defeat in China, the world's biggest market for mobile phones, which CEO Tim Cook said he expects would be the company's biggest market. The company's ranking in China's smartphone market fell to No. 6 in the third quarter of 2012 from No. 4 in the prior quarter.

The decline pushed Apple even farther behind Samsung (No. 1) in China, and gave local vendors Huawei crowing rights over their better known rival.

Apple's one-product approach (basically the iPhone) to the smartphone segment means it cannot compete with the multi-products strategy deployed by Samsung and other rivals. Current forecasts reflect the conundrum facing Apple. While the company still maintains a firm grip on its current consumer base, and though it's not in danger of losing many of them, it's unlikely to grow at a double-digit rate in the future.

In its latest forecast, IDC says Apple iOS will raise its share of the smartphone operating system market to 19.1 percent by 2016 from 18.8 percent in 2012. The Google Android OS market share is forecast to drop during the same period, but to a still dominant 63.8 percent from 68.3 percent. The biggest gainer during the forecast period is expected to be Microsoft's Windows OS, which is climbing to 11.4 percent market share by 2016 from less than 3 percent at the end of 2012.

IDC's analysis indicates why Apple's growth will be more muted in coming years, and also points to the dilemma facing the company's suppliers. Many of these component suppliers are overwhelmingly dependent upon Apple, and their fortunes will rise or decline with the company's -- unless they can dramatically diversify their customer base, a development that can be complicated by Apple's insistence on using customized parts. Here's how IDC describes the underpinning of the Android-iOS competition:

IDC forecasts Android to be the clear leader in the smartphone mobile operating system race, thanks in large part to a broad selection of devices from a wide range of partners. Samsung is the leading Android smartphone seller though resurgent smartphone vendors LG Electronics and Sony, both of which cracked the top five smartphone vendors during 3Q12, are not to be overlooked. IDC believes the net result of this will be continued double-digit growth throughout the forecast period.

iOS will maintain its position as the clear number two platform behind Android at the end of 2012 and throughout the forecast. The popularity of the iPhone across multiple markets will drive steady replacements and additional carrier partners will help Apple grow iOS volume. However, the high price point of the iPhone relative to other smartphones will make it cost prohibitive for some users within many emerging markets. In order to maintain current growth rates, Apple will need to examine the possibility of offering less expensive models, similar to its iPod line. Until that happens, IDC forecasts iOS to ship lower volumes than Android.

Of course, these forecasts and analyses are subject to revisions as shifts in demand patterns, technologies, and strategies rearrange market share among the leading smartphone manufacturers. For now, though, Apple component suppliers must be feeling the unusual cold draft of supplying products to a company once thought invincible.