This week, Apple announced financial results for its September ending fiscal fourth quarter and analysts and stockholders were quick to respond. This latest event, coupled with the recent new product announcements for tablets and smartphones will no doubt, continue to place enormous challenges on Apple’s supply chain teams. As we pen this posting after the stock market closing one full day after the earnings announcement, Apple stock closed down $13.20 or 2.29 percent from the day’s opening.
In the September ending quarter, Apple posted quarterly total revenues of $37.5 billion and a quarterly profit of $7.5 billion. These results compare to total revenues of $36 billion and net profits of $8.2 billion in the year ago quarter. The company sold 33.8 million iPhones, 14.1 million iPads and 4.6 million Macs in the fiscal fourth quarter. Gross margin was reported to be 37 percent down from 40 percent a year earlier, as increased costs associated with new production introduction and intense competition ate away margins.
What really caught the market’s attention was Apple’s guidance for the all-important upcoming holiday quarter which includes revenues of between $55 billion to $58 billion and gross margin between 36.5 percent and 37.5 percent. In its reporting of these projected financial results, Bloomberg Businessweek noted that this forecast “would be the slowest holiday-sales rise since 2008, when revenue jumped 6 percent. Profit would be the same as last year, based on Apple’s predictions for gross margins.”
In the earnings briefing, CEO Tim Cook exclaimed that the company’s lineup of tablets would do well: “we think it’s going to be an iPad Christmas”. Regarding the new lineup of iPhones, Cook noted that the 5s model ended the quarter with significant backlog, but supply is building each week. Commenting on the newly released iPad Mini with retina display: “we’ll start shipping later in November. We know how many we can make but we won’t be able to assess demand until we ship” Regarding the controversial pricing strategy associated with the new lineup of smartphones, Cook stated: “If you look at what we’ve done, we’re selling the iPhone 4 as our entry level model. We sell the iPhone 5c as a mid-tier device. And then we have the iPhone 5s at the high end. Obviously some people read rumors about the 5c being an entry-level device, but that was never our intent”
In the view of Supply Chain Matters, that collection of above statements is the clear reinforcement of the Apple supply chain challenges that lie ahead. The release of the new lineup of iPads was pushed back to this month because of a series of rumored supply delays, particularly concerning the Mini’s retina display. A new untested contract manufacturer, Pegatron, is now added to ramp-up challenge.
The iPhone 5c was widely speculated to be Apple’s smartphone product to meet consumer growth across emerging markets. In our previous commentary concerning the IHS teardown analysis of the 5c, a preliminary analysis by IHS declared that “the iPhone 5c is basically an iPhone 5 in a plastic disguise.” IHS pegged the full bill of material and manufacturing cost of the 5c model with 16G of memory at a value of $173 with the unsubsidized carrier price tag of $549. The firm also concludes that in order to meet expectations of an unsubsidized target of $400, which is considered attractive for emerging markets. the manufacturing cost would have had to come in at a targeted $130 cost range. Thus the supply chain cost savings opportunity ramp appears to be steep with the current design, adding more challenge to product margin goal performance. There have been recent reports and rumors from the Apple supply ecosystem indicating that production forecasts concerning the 5s and 5c are already being adjusted in favor of lower forecasted needs for the 5c, and placing more dependence on the 5s to deliver revenue and product margin goals in the coming shipping quarters.
Apple’s CEO has indeed declared that it is going to be a great holiday shopping season for the company, but its supply chain teams may face rather difficult challenges in meeting that outcome. A combination of late product launches, constrained supply concerning the most desired product models, a ramp-up of new suppliers and increased costs of premium transportation may all compound themselves. More geographic markets are involved in order to meet revenue goals and we have already speculated on building tensions among sales, marketing and the supply chain. Rumored distribution agreements with China Mobile are still to be factored.
Apple will indeed be one of the supply chains to watch in the upcoming holiday surge.
The again, Apple’s supply chain has often risen to such challenges and may rise to the latest set of challenges.
Supply Chain Matters provides an update regarding our previously published supply chain disruption alert involving current flooding conditions in Thailand.
A published report on Bernama, the Official News Agency of the Government of Malaysia, published late last week indicates that the flooding that has affected Thailand for a month now is estimated to cost economic damage of between 10-15 billion baht. It further reports that the damage could have been worse if it had affected Thailand’s industrial areas. However, the flooding did affect the entrances to some of those factory areas causing workers great difficulties in getting to work.
A syndicated Reuters report featured on the Chicago Tribune web site on Monday reports that 17 factories were temporarily shut on Monday at the Amata Nakorn Industrial Estate, dominated by foreign companies, after flood waters blocked nearby roads. As we pointed out in our earlier posting, this industrial complex houses a number of Japanese based producers within both automotive and high tech supply chains. In the latest Reuters report, a spokesperson for Amata Nakorn is quoted as indicating that the 17 factories were shut after the workers proved to be unable to reach them and the Thailand navy has been asked to help pump out the water. The estate was using more than 100 water pumps to speed drainage and the situation was reported to have improved from the weekend, with levels in many areas dropping 6 inches. Likewise, flood waters in the remainder of the country have eased.
Thus, while it does not appear that the current flooding is in any way taking on the severity to what occurred in 2011, there are temporary interruptions of supply continuing as government agencies and industrial estate owners continue to work on clearing roads and industrial park entrances.
Procurement and supply chain planning teams can obviously breathe easier but should continue to monitor developments and plan for temporary disruption.
There is little doubt that relationships among sales and marketing and supply chain teams can be tested at times. Both organizations are often driven from different objectives or performance goals.
Sales and marketing can be focused on product and sales performance goals, market share domination, or product pricing strategies they feel will bring revenue growth. Supply chain management teams are often caught in the middle of this dynamic. On the one hand, senior management expects the supply chain to enhance customer responsiveness and attain customer service and fulfillment goals. On the other hand, there is an expectation that supply chain teams must continue to contribute to either cost efficiency or cost reduction goals.
A classic case study of this dynamic is now playing itself out at Apple.
Readers will recall that in September, Apple announced its latest editions of new smartphones, both the iPhone 5s and the iPhone 5c. The belief of many, including Supply Chain Matters, was that Apple’s product and market share strategy, and its consequent supply chain strategy, would shift into two dimensions, one of continuing to provide the most innovative smartphone model that consumers would desire to buy. That effort continues with the current introduction of the iPhone 5s. However, Apple’s premium pricing strategy has created barriers for emerging market consumers, such as those in China. Thus all indications, including supply chain related, were that a lower-cost model, which many pegged to be the iPhone 5c, would be Apple’s response to the market. Apple’s announced pricing for the 5c squashed that premise, and Wall Street and the rest of the industry did not seem all that impressed. Our commentary at that time concluded that Apple had now placed its supply chain with enormous challenges.
Initial information leaks and business media reporting are now uncovering the dimensions of these challenges. A Supply Chain Matters commentary noted recent IHS teardown analysis indicating that the 5c was essentially last year’s iPhone 5, with an enhanced communications processor in a plastic casing available in five colors. That conclusion is now echoed in other business and social media outlets.
This week, The Wall Street Journal published a headline article, New Doubts on iPhone Strategy. (paid subscription required or free metered view) The opening sentence tells it straight-forward: “Apple Inc. hoped to broaden its appeal with a cheaper version of the iPhone. But that effort appears to be faltering, after a few weeks.” The article continues to describe how in essence, Apple’s supply chain teams are now adjusting the supply pipeline for both models, including the reduction of initial 5c production pipeline, and increasing initial 5s forecasts based on current product demand data. It cites sources indicating that contract manufacturer Pegatron was requested to cut 20 percent of this quarter’s orders for the 5c model, while contract manufacturer Foxconn (Hon Hai Precision) was requested to cut 30 percent. A separate China based web site indicated a 50 percent overall cut in 5c production, most likely because the WSJ notes that a component supplier was notified that 5c parts would be cut by that amount. At the same time, current quarter’s supply orders for the 5s model have been increased at Foxconn. The WSJ cites employees at several Best Buy retail stores in the eastern U.S. reporting: “ample supplies of 5c’s but thinner stockpiles of 5s.” We have read of various other web published reports that indicate lead times for a 5s model now average 2-3 weeks for customers and good luck finding the gold casing model.
Thus, the effects of sales, marketing and pricing strategy that is driven by product margin growth has impacted original product forecasts, in the crucial holiday buying quarter. That has got to create some tension in Apple’s supply chain ranks. But, these types of challenges are common for many supply chain planning and execution teams.
However, more supply chain related challenges are on the horizon. Apple has scheduled another product launch event later this month with lots of speculation surrounding new and improved models of iPads and Mac computers, just in time for the soon to be holiday buying season. There are lots of separate rumors surrounding component or product availability of these new models, hence the delay in the product launch announcement.
This week, Apple also announced that the former CEO of fashion apparel maker Burberry, Angela Ahrendts, will assume the senior leadership role for both Apple’s retail and online stores, and Apple CEO Tim Cook was quick to note her new emphasis will be on further enhancing the customer experience.
Tensions among sales, marketing and the supply chain can indeed be rather dynamic and if our community needed a fresh study, keep your eye on Apple and its supply chain planning, response and operations management team’s performance over the coming months.
What makes this real-time case study ever more interesting is the fact that Tim Cook’s management DNA stems from operations and supply chain management, having previously led Apple’s efforts in these areas during the leadership of Steve Jobs. There is some speculation as to whether Jobs appreciated the needs or capabilities of supply chain, or that his expectation was that timely production innovation reigns, and the supply chain must react and respond. By our view, the open question is whether that culture sustains.
How do you weigh in?
For the past couple of weeks Supply Chain Matters has been monitoring the Internet on reports of widespread flooding rains occurring throughout Southeast Asia. Today, a Reuter’s published report indicates that flood waters have breached an industrial estate to the east of Bangkok, stirring fears of a repeat of the devastation and industry supply chain disruption that occurred in the area in 2011. Authorities however stress that floodwaters are moving in a different direction than what occurred in the widespread flooding of 2011, but that factories that were sparred in 2011, could be at risk.
According to Reuters, Amata Corporation, Thailand’s biggest industrial estate developer indicated that its Amata Nakorn industrial park in Chonburi province was operating normally despite minor flooding. Water reported to be at a depth of 15 cm (6 inches) has entered the park and accumulated in three areas. The developer indicated a plan to build a temporary floodway if conditions worsen. The report indicates that half the factories in this industrial park hail from Japan and produce automotive components. Reuters further indicates that Toyota is evaluating risk management scenarios for one of its three assembly plants in Thailand.
Based on this news, Supply Chain Matters advises industry supply chain teams with suppliers or value-chain facilities located in Thailand to continue or step-up monitoring of events occurring in that country, and at supplier facilities, particularly current states of flooding, infrastructure and transportation conditions in the region. While reports would seem to indicate this is not at all the conditions that occurred in 2011, caution is always advised.
If any of our readers have first-hand knowledge of conditions please share them by adding a comment to the bottom of this post or if you prefer, email: info <at> supply-chain-matters <dot> com and we will update our readers with any first-hand reports of conditions.
Like all things related to Apple, the race is on for research firms to discover the innards of the newly released iPhone 5s and iPhone 5c models, not to mention hacker competitions as to who can first discover product vulnerabilities like the new fingerprint scanner incorporated in the 5s, are underway in earnest.
On the teardown front, research firm IHS has issued rather startling preliminary findings, which should be the interest of product management and supply chain time-to-market teams. It certainly caught our attention since it refutes the theory that Apple was deploying a lower-cost supply chain segmentation strategy.
In its findings, IHS concluded that the iPhone 5c “turned out to follow Apple Inc.’s familiar formula, combining premium pricing with a hardware design almost completely identical to the original iPhone 5” IHS further concludes “The biggest difference between the iPhone 5c and the original iPhone 5 lies in the radio frequency (RF) transceiver, which has been updated to support more 4G Long Term Evolution (LTE) bands.” The IHS senior director of benchmarking indicates ““The iPhone 5c is basically an iPhone 5 in a plastic disguise”
Web based repair guide firm iFixIt also published a pictorial look at the inside of the new 5c model which seems to reinforce the use of similar iPhone 5 components.
From our Supply Chain Matters lens, so much for the notion of Apple’s track record of value-chain innovation, and our belief that Apple was charging ahead with a lower-cost supply chain segmentation value-chain. That might have been the original intent, but these findings indicate otherwise. More than likely, it is a risk mitigation strategy involving the supplier segment.
In its preliminary analysis IHS pegs the full bill of material and manufacturing cost of the 5c model with 16G of memory at a value of $173 with the unsubsidized carrier price tag of $549. The firm also concludes that in order to meet expectations of an unsubsidized target of $400, the manufacturing cost would have had to come in at a $130 cost range. Thus the supply chain cost savings opportunity ramp appears to be steep with the current design. Perhaps Apple’s engineering teams have something else in mind.
On the value-chain plus side, according to IHS, Apple was able to innovate cost curve and functionality savings by working with its three strategic LCD screen providers, garnering more enhanced functionality at similar cost.
Again by our view, if these findings are corroborated by other sources, it is going to shed a lot more concern on Apple’s overall smartphone product strategy in regards to contrasting strategic strategies, one for garnering scale by expanding emerging market penetration or the other in maintaining healthy product margins. We are certainly going to review the inside details of this IHS teardown to determine which is at play. Then again, Apple is the ultimate determinant.
A supplemental data point concerns current business media reports that Apple sold as much as 8 million phones in the first week of introduction. That is certainly impressive but some of the reports point to the factor of building channel inventory and potential distortions as to which model sold the most in the first week. For its part, Apple is refusing to provide further details, which adds more to speculation. In its reporting, the Wall Street Journal quotes a Piper Jaffrey analyst as indicating that as much as 2.5 million units may have been shipments to non-Apple retailers, netting first week unit sales to 5.5 million units, in range with similar iPhone shipments in the first week.
At this point, we can all wait and anticipate how events will play out from here. Inventory of the 5s has sold out and rumors of volume ramp issues persist. How the 5c will be received in emerging markets will be factored by how quickly Apple wraps up new distribution deals with carriers China Mobile and others, and how consumers vote with their wallets.
In all cases, Apple’s supply chain teams will be smack in the middle of these developments, while continuing to both fill the volume and new product pipeline. We speculate that certain of Apple suppliers if ever released from the shackles of sworn secrecy would have an opinion as to whether ‘design for supply chain’ is an active principle being practiced in Cupertino,
Quite the interesting drama for those of us with supply chain DNA.
A quick update regarding our commentary at the end of May regarding Google’s Motorola Mobility division prior announcement that it would manufacture its new flagship Moto X smartphones in the United States. At the time, we noted that Motorola had contracted for the manufacture of the Moto X at a facility near Fort Worth Texas but the essential supply chain components were to be sourced outside of the United States.
A recent article published in Bloomberg’s Global Tech Newsletter indicates that teardown analysis from IHS and other firms would indicate that nearly all of the parts are sourced from Asia or Europe. None the less, Motorola can still lay claim to “assembled in the U.S.” which is significant in itself. Motorola is further practicing sourcing to enable U.S. customer personalization.
Supply Chain Matters remains in the point-of-view that the decision to source final assembly in the U.S. remains a bold one and far upstages that of Apple and its prior announcement to assemble a line of Mac computers in the U.S.
According to Bloomberg, U.S. made components amount to little more than 15 percent. DRAM memory is sourced from both Samsung and SK Hynix, both based in South Korea while Samsung also is the supplier for the Moto X LCD screen. The chips that connect the cellular network, support WiFi and run software are provided by Qualcomm which outsources its chip manufacturing to Taiwan based TSMC and Abu Dhabi and German foundries of Globalfoundries. The article further points out that the accelerometer, microphone and near-field communications chips are most likely sourced externally as well. Bloomberg quotes an IHS analyst declaring: “While it’s impossible to tell exactly how many of the components are U.S. made, it probably amounts to little more than 15 percent.”
However, the decision to assemble in the U.S. is more than symbolic since it allows AT&T customers the flexibility to personalize their smartphone with desired color or wooden backs, which is important consideration for supporting personalization features of products. The Fort Worth facility has been reported to be able to employ upwards of 2000 people to support Motorola’s needs.
High tech and consumer electronics supply chain professionals can certainly speak to the long-term realities or viabilities of a more robust consumer electronics value-chain that can be sourced in the U.S., in the case of bragging rights, Google certainly has one up with Apple in efforts to show some form of commitment.