Apple Inventory Slash Felt by the Supply Chain (For Now)

Suppliers across the supply chain are feeling Apple's first drop in revenue since 2003, but some analysts say the pain may be shorted lived before the next-generation iPhone launches.

In the immediate, a spate of bad news reflects an obvious slowdown in Apple's demand for components. Apple recently reported its first quarterly drop in revenue since 2003 as it reportedly scaled back inventory by an estimated three million units for June. Apple's announcement in April prompted an 8% plunge in its share price as $40 billion evaporated from its market cap.

“I would say that it's safe to say that reduced inventory of iPhones would ultimately cascade its way into the supply chain,” Andrew Rassweiler, an analyst for IHS, told EBN.

Much of the weakness is due to lower-than-expected demand for the iPhone 6s, especially in China.

Source: Apple

Source: Apple

 “We are disappointed by Apple's quarter and guidance, as it reflects a much weaker iPhone 6s product cycle than we had anticipated, with most of the negative surprise versus our expectations coming from China,” Goldman Sachs analyst Simona Jankowski wrote in a report.

However, Apple's slackening demand could be short-lived. Apple's suppliers have also obviously felt a slowdown in Apple's sales before its quarterly revenue decline in April.

“The supply chain already felt those effects prior to this announcement so it's likely past news for them,” Rassweiler said. “It's likely however that these effects will be minimized for some suppliers by the introduction of the new iPhone in just a few months.”

Publicly traded 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, serves as a good bellwether for Apple's demand. Earlier this year, TSMC issued a sales warning, forecasting slackening growth due largely to lower demand for mobile phone components, although it did not specifically cite Apple

“Apple's decline in sales and subsequent reduction in component demand will definitely impact its major foundry partner TSMC,” Len Jelineck, an analyst for IHS, told EBN. “The impact actually will be short-term due to Apple's anticipated ramp for holiday sales which will start in late Q2. There will be additional impacts throughout the supply chain but these impacts will also be limited to the second fiscal quarter.”

Electronic buyers could see price reductions for certain components thanks to slackening demand from Apple. However, any potential price reduction would also likely be limited to “just a few components,” and even then, that could be short lived before Apple eventually boosts its orders for the parts as it ramps up for the next-generation iPhone's production, Rassweiler said.

In the immediate future, demand for Apple's iPhone SE is expected to drive sales higher at anticipated rates. China relative lack of demand for the more pricy iPhone 6 was a main factor in Apple's recently lack of growth. However, the cheaper iPhone SE is expected to offer a better high-volume fit for China and emerging markets, such as India.

“The iPhone SE was specifically positioned for emerging markets such China and India. However, the SE became available March 31, so sales metrics were not included in Apple's recent Q2 reporting,” Brent Iadarola, a Frost & Sullivan analyst told EBN. “As the lower-priced iPhone SE enters the mix, expect this form factor to drive sales in the Asia Pacific region at the expense of average selling prices.”

In the medium term, Apple's role as one of the leading purchasers of smart phone components remain secure. Apple may have reported lower demand in its recent quarter and slashed inventory accordingly, but its outlook remains bright.  “We expect Apple inventory channel reduction given the current macro environment. However, it's important to look at the big picture, such as how smartphones currently represent less the 50% of the global phone market,” Iadarola said. “Clearly this suggests there is still ample room for growth, particularly from emerging markets. In India, for example, iPhone sales were up nearly 60% from the previous year.”

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