Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement.  Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.

As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.

Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version.  That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed.  The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.

In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features.  Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.

Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.

A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.

Of further significance was what was not announced yesterday.  There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.

Apple’s supply chain teams now face rather tough challenges in the weeks and months to come.  Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.

Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen.  Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.

More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.

Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock.  This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.

The new transparency of Apple and its supply chain is becoming more visible and more concerning.

Bob Ferrari