Advertisement

Blog

Suppliers Squeezed as Apple Cuts Components Orders

{complink 379|Apple Inc.} has reportedly drastically scaled down orders for components from suppliers as the company faces increased competition from rival {complink 4751|Samsung Electronics Co. Ltd.}. 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.

14 comments on “Suppliers Squeezed as Apple Cuts Components Orders

  1. Barbara Jorgensen
    January 14, 2013

    This will be particularly bad for companies that count Apple as their single largest customer. Although most component makers don't use Apple's name, a few chip makers rely on Apple for more than 50 percent of their quarterly revenue. As analysts pointed out last year, Apple is an economy in and of itself, so it's going to hurt everyone in its supply chain.

    I know many iPhone users that aren't happy with the costs associated with the iPhone 5 and are perfectly happy with the iPhone4S. I think Apple overestimated itself this time by introducing a product that's not compatible with many of its own accessories; requires lots of data but is otherwise similar to prior products.

    I also wonder if pricing isn't beginning to play a role. At Samsung's prices, I'm willing to try new things (a tablet, for example) without feeling gypped if it doesn't live up to expectations.

  2. FLYINGSCOT
    January 14, 2013

    I wonder if Apple reign is coming to an end or at least a rock patch in the road.  I speak to a lot of people these days who seem delighted with their Droid phones and even the latest Nokia Windows phones are being well received (according to my one man straw poll that is)

  3. rohscompliant
    January 14, 2013

    I believe that Samsung is pretty well vertically & horizontally integrated; more so than Apple? They put their own stuff into their own phones as a result they have a better handle on costs……no? After seeing what the new Samsung phones can do over this past weekend I am not surprised that they have a larger market share. We gave one of our adult children a new IPhone5s for Xmas and after using it a bit I asked him why his new phone is better tham my IPhone 4S……he had no concrete answers that it was……..good thing he got a bunch of Apple Gift cards…….so he can buy all the new peripheral accesories required since they changed their connection points……..not a smart customer loyalty move………APPLE is going to have to get it's act together again….get off their high horse.

  4. bolaji ojo
    January 14, 2013

    Barbara, Your comments included several valid points. Pricing was considered irrelevant in the case of Apple because it was assumed people would be ready to pay a premium for its products. That was the case until competing products became “competitive,” that is, they matched and in cases exceeded Apple devices.

    The second equally important point you made is the forecast Apple had for its products. The company failed to correctly read market conditions. I've noted for a while that rivals had to “get it right” otherwise they would be burried under the Apple avalanche. In reality, though, they were bound to eventually hit the mark through sheer determination and the reality that their businesses could go under if they failed to match Apple's design and production efficiencies. What Apple needed to do was anticipate this and try to stretch it out as much as possible. The executives also should have been checking out rivals' products and the consumers' acceptance level for these products. This would have been considered as they planned production forecasts. It's possible they believed their own hype.

    The real issue here is where do suppliers go from here? Apple is still a major consumer of electronic parts and I can't imagine any supplier lucky to have its products designed into its devices turning down orders because one set of forecasts were off.

  5. bolaji ojo
    January 14, 2013

    There may be a simpler explanation for the reduction in components orders by Apple. It's not such a huge surprise that demand drops at the start of a new year. Any surge in demand during the holidays usually results in a big drop off in the first quarter and most companies anticipate this and signal to suppliers ahead the need to cut supplies.

    Apple may not have done this initially because expectations have always been that the company would defy the traditional post-holiday sales lull. That's obviously no longer the case. Competitors' products are better and demand for them stronger.

  6. _hm
    January 14, 2013

    Another reason for Apple reducing current order is that they may be coming out with new iPhone! Good products by Samsung and other. Lower cost is good for consumer. Apple must reduce cost of their product.

     

  7. bolaji ojo
    January 15, 2013

    _hm, That doesn't explain it. Apple may be coming out with a new phone but that's in the future and many of the components in the current device will be used.

  8. Barbara Jorgensen
    January 15, 2013

    Bolaji: I agree regarding suppliers. Normally, I'd suggest they take their business elsewhere, except in this case, Samsung is so vertically integrated that suppliers will have less of an opportunity. Even at a competitive price, Samsung could probably beat it. I think a few key select suppliers whihc already have inroads are well positioned at Samsung. I would also think that Apple uses suppliers common to many of its products, so maybe they'll spread some of that sell around. But Apple's cuts will definitely hurt the supply chian at large.

  9. chipmonk
    January 15, 2013

    Apples vulnerability is its dependence for critical components on its competitors. Samsung is world leader in display technology, memory chips and is going really gung ho. They have deep expertise and capabilityin Physics, design and manufacturing. To stay ahead of the pack in established products like SmartPhones & Tablets, Apple will have to create a deep bench itself. Won;t hurt if Apple brodened its supplier base and went back to Japan, in spite of Japan being 20 % more expensive than So. Korea or Taiwan. Of course Apple can squeeze a few more years of high margin by bringing out entirely new products like a networked TV. 

  10. kjosefschmidt
    January 15, 2013

     

    Apple's push-out of orders is a wake-up call for suppliers that have invested the majority of their resources in one customer. These are Apple suppliers that, in order to support Apple's demands, have turned away business from other customers. They will soon be pleading with those other customers for a second chance. The ripple effect will result in extra factory capacity throughout the supply chain, including second and third tier suppliers, and suppliers will be scrambling to fill that capacity by offering component prices below market as an incentive to gain design approval as a second or third source.

  11. Wale Bakare
    January 15, 2013

    It is becoming a difficult markets for others in smartphone sector. Apple should look beyond one i – phone making in world markets. Today, Samsung marked 100million sale of just a product( Samsung Galaxy S II) amongst its many smartphone brands. Yet, it's still selling more on its Note III, ACE and others.

  12. _hm
    January 15, 2013

    If Apple result detoriates further, will Tim Cook be forced out? Apple needs some technical leader to give new path to it.

     

  13. bolaji ojo
    January 15, 2013

    _hm, Tim Cook's neck is not on the line even if Apple's performance deteriorates and that's not really the case here. The company doesn't have another big name executive waiting in the wing but I am sure they won't have problems replacing him.

  14. bolaji ojo
    January 15, 2013

    kjosefschmidt, You just put your finger on one of the long-term reasons behind some of the industry's demand-supply imbalances. Well put!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.