Suppliers are feeling the pinch of slackening demand for Apple's iconic iPhone, while the shortfall in sales growth could also affect component prices.
As one of the world's most sought-after design wins, the iPhone is beginning to lose its luster as a supplier's goldmine as Apple struggles to maintain its share in the increasingly tough smart phone market.
"There are so many other competitors in the market that it becomes difficult to maintain a dominant market share with so many other options for consumers," Todd Day, a Frost & Sullivan mobile and wireless communications analyst, told EBN. "Unlike the early years of the iPhone, there are now other devices that have the look, performance, and features to both compete and surpass the iPhone."
As Apple forecasted that it will see its first revenue decline in 13 years during this quarter after reporting its lowest-ever rise in quarterly iPhone sales, suppliers, of course, had already responded to the lower-than-expected demand for components since last year.
Foxconn, Apple's largest contract manufacturer that depends on Apple for most of its sales, has begun laying off workers in response to slower iPhone demand. The local Taiwanese government has also offered 81.9 million yuan ($12.4 million) in subsidies to encourage Foxconn to keep more workers on the payroll, according to the Wall Street Journal.
Citing a Fubon Securities research note, the Wall Street Journal also reported that the capacity utilization rate of Pegatron Corp., which is Apple's second-largest contract manufacturer after Foxconn, had dropped from almost full capacity to 60%.
Taiwan Semiconductor Manufacturing Co (TSMC), which makes the iPhone's A8 SoC for the iPhone 6 and the iPhone 6 Plus and the A9 (which Apple also sources from Samsung, according to Chipworks) for the iPhone 6s, has issued a sales warning, forecasting up to a 10.8% drop in revenues during the first quarter compared to the same period last year.
While TSMC attributed its revenue shortfall to decreasing demand from the smart phone market without citing lower demand from Apple for iPhone components, Apple components represent 20% of TSMC's sales, according to a Credit Suisse report.
Largan Precision Co., which makes camera components for the iPhone, saw a double-digit drop in sales during the last quarter and says its sales are weakening during the current quarter.
Slower demand for iPhone components will not have an effect on the prices Apple will pay for iPhone components in the near and medium term. This is because prices have been agreed upon a long time in advance and are also already finalized for the iPhone 7, Jim Morrison, vice president, competitive technical intelligence, for Chipworks told EBN.
However, suppliers that offer the same components to Apple for the iPhone and to other OEMs will likely have more "breathing room" when negotiating prices with other customers, Morrison said. "Could suppliers get aggressive on pricing with their other OEMS on new contracts to make up for potentially lost future revenues? Absolutely. No facts whatsoever on this," Morrison said. "This is based upon experience and discussions with my customers."
However, in general, since suppliers will have pre-negotiated long-term contracts with predetermined price erosion over time for the iPhone, slowing demand from Apple "may or may not accelerate this normal process – depending on the uniqueness of the component," Andrew Rassweiler, an analyst for IHS, told EBN. "In cases where the components produced for Apple are not unique to Apple, a sudden surplus of these parts could create accelerated price reductions in the market, but would be limited to a handful of parts," Rassweiler said.
The wind does not blow all bad
However, despite lower-than-expected sales growth, the iPhone generated record sales last year and are expected to increase this year. The problem is that growth is slowing.
"The problem exists when demand is lower than anticipated or growth is slightly slower. While this past quarter was slightly lower than expected, the overall growth was good for iPhones," Day said. "The iPhone is still arguably one of, if not the top device on the market--just not so much so that it is heads and shoulders above the rest any longer."