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Apple’s New iPad Mini Introduction Raises More Supply Chain Concerns

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This week, Apple again captured business media attention with its latest new product unveilings. Included was the announcement of the iPad Mini, a 7.9 inch screen model which Apple touted will open up tablet computing for the masses in a big way.  The latest product unveiling announcement is timed for the start of the upcoming holiday buying season and Apple always insures that the market demand-pull is properly positioned before the largest selling quarter. The entry level Mini goes on-sale on November 2.

The biggest surprise of all was the announced price which starts at $329 for the entry 16GB model with WiFi.  Wall Street’s reaction was both surprise and elation.  Many equity analysts expected the mini to debut at a lower price in order to compete with existing tablets such as the Amazon Kindle Fire HD and the Google Nexus 7, whose entry pricing in just below $200. There was added elation since the higher entry price equates to even more profits for Apple.

Apple itself is betting big that consumers are willing to once again pay a premium price for the Apple experience of a more elegantly designed and functional product.  Accounts of the product unveiling noted that Apple’s marketing chief, Phil Schiller, touted the finely crafted aluminum casing of the Mini, as opposed to the plastic casing of competitor offerings, as well as lighter weight.

In mid-February and again in mid-July, Supply Chain Matters contrasted two different supply chain strategies. One is a low-price, high-volume, strategy that is supported by a lowest cost supply chain. The strategy supported is one of high market saturation, utilizing an electronic device as a platform to leverage much higher margin electronic content revenues and profits.  That is considerably different than offering a product to the market at a premium price with its own high margins, and with the potential of leveraging additional high margin electronic content. The argument is to not confuse both strategies since the former is really about penetrating untapped, growing consumer markets in the developing countries, such as China and India.

Tim Cook and his management team have obviously elected to fuse both strategies with a confidence that pent-up demand for Apple branded products will always motivate consumers to pay a premium price.  Although we have not read of the component teardown analysis of the iPad Mini in terms of manufactured cost, we strongly suspect it is benchmarked to existing $200 market entrants. That provides Apple the opportunity to drop the price when it deems appropriate to do so, particularly if emerging market consumer’s, business and educational institutions balk at the announced price. Having a current supply constrained supply chain also supports a higher price while having the option to later cut prices when supply response can match product demand levels. The current hefty margin also provides profit considerations for channel and retail partners.

Wall Street equity analysts are speculating that Apple will sell upwards of 10 million iPad minis by the end of the year. However, certain supply chain realities may dampen that expectation. Similar to what occurred with the recent introduction of the iPhone 5, there are already reports of supply shortages of the touch-panel screens. Suppliers Au Optronics and LG Display have their own separate challenges in terms of production ramp-up. A review of last night’s announced Q4 2012 quarterly operating results from Apple also provides other clues.  CEO Tim Cook acknowledged a significant state of backlog regarding the ability to fulfill current iPhone 5 orders. A review of Apple’s detailed operating  performance in Q3 indicates that the company was able to ship over 50 million iPods, iPhones and iPads, a considerable achievement for any global supply chain.  However, in Q4, that number slipped to slightly over 46 million units. If one considers that the current demand levels are insatiable, than the 4 million shortfall is most likely an indicator of the current supply response challenges.  There are reports that international air freight carriers are feasting on high levels of Apple related priority shipments to and from China. The upcoming quarter will add further stress and new priorities with market demands for the iPad mini.

Supply chain professionals are very tuned into the concepts of design-for-supply-chain. In a nutshell, it is a practice where product design is tailored to accommodate high volume, lower cost efficiency production needs across the supply chain.  That would include common product platform components, easier assembly, and packaging for shipment.  Contract manufacturers such as Foxconn have the inevitable task of having to influence Apple product designers in these concepts, but the culture of Steve Job’s no-compromise on design probably negates design-for-supply-chain consideration. While the mini may have an elegant aluminum bezel, plastic bezels are easier to produce and assemble onto final units.

The market introduction of the iPad Mini is another watershed event for Apple’s global supply chain network, one that will play out in many dimensions over the coming months.

Bob Ferrari

© 2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.

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