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.

Bob Ferrari