Thursday , February 25 2021

What a bad Apple can be terrible suppliers

In a world where iPhone demand has dropped, Apple Inc. has Plan B. Since customers have long been between innovations and smartphone market-saturated fats, Apple may retreat to higher prices for each handset and rake more money from services such as streaming music, digital video and data storage.

But many companies that supply iPhone components do not have a backup.

The latest evidence that Apple's bad deal could be terrible for suppliers occurred over the course of an hour on two continents. Japan Display Inc., which receives more than half the revenue from the iPhone manufacturer, reduces its prognosis. Then Lumentum Holdings Inc., the leading manufacturer of iPhone-based face detection sensors, downgraded its forecasts for the second quarter. On Tuesday, Hon Hai Precision Industry Co., the largest installer, missed estimates.

"Suppliers are more dependent on volume than Apple," said Woo Jin Ho, an analyst at Bloomberg Intelligence. "This creates an increasing risk in the rest of the supply chain." Apple did not respond to the comment request.

Apple's shares dropped by 5% on Monday, while Lumment fell by more than 30%, while rivals II-VI Inc. fell by 13%. Japan Display fell 9.5%, while Hon Hai Precision Industry Co. dropped to its lowest level in five years.

In Europe, Dialog Semiconductor Plc, which gains most of Apple's sales, fell by 3.6% at the beginning of Frankfurt. Austrian ams AG, another supplier, slipped to 3.2% after the first day's decline by 22%.

Facing the maturation of the smartphone market, Apple's strategy is to encourage customers to pay more for phones with new features, such as face recognition and more vibrant screens.

Icons include 3-D sensor components from companies such as Lumentum, which often cost more than $ 1,000. Few people can afford to pay so much for a new device. But when it comes to sales, suppliers receive a one-time payment for their component, but Apple can generate hundreds of additional dollars for one gadget. In its latest quarter, Apple reported that the number of almost sold iPhones has not risen, while revenue from this business grew 29% over the previous year.

If demand for the newer, more expensive iPhone products is reduced, Apple can cut parts orders or delay shipments, leaving suppliers with more inventory. This is likely to reduce their prices when Apple returns to the negotiating table.

Lumeness's weaker sales forecast was the San Francisco-based first-day conference drop in shipping from its largest customer just a couple of days ago. Lumentum did not tell the customer and the company's representative refused to comment, but Apple is its largest customer, according to Bloomberg data.

Apple is increasingly using its 1.3 billion installed device base, not how many iPhones it sells on a quarterly basis. And the company has made changes to keep these existing customers happy by selling more services to them.

"Apple is no longer a traditional hardware business," said Louin Ventures, veteran Apple analyst Gein Munster. "The Apple investment paradigm is moving away from focusing on the sale of devices to a more predictable service-oriented business."

This year, Apple has taken steps to extend the time for iPhone phones. This will most likely discourage people from upgrading to the latest devices – another terrifying sign for suppliers.

At the beginning of the year, the company confirmed that it deliberately restricted the speed of some older phones in order to avoid battery-related problems. After the protests, the company offered cheap battery upgrades, extending the life of many phones.

More recently, Apple has launched a new operating system version, iOS 12, which supports up to now 28 of the company's devices, including models sold in 2013. Past iOS updates are supported gadgets that have been running for several years, but this is the first Apple to have increased the priority of older iPhones. The refreshed software can open up the camera on the older iPhone 70% faster and the keyboard is up to 50% faster than last year's update on iOS 11.

"More durable products could increase customer satisfaction, potentially allowing Apple to charge higher prices for its devices and help meet its environmental goals," Sanford C. Bernstein & Co. analyst Toni Sacconaghi wrote on Monday a note to investors.

It could prolong the iPhone's replacement cycles for six months to 3.2 years and push the unit sales down by 6 percent a year for three years, he calculated.

With longer-lasting iPhone users, users can subscribe to new services more, making Apple's products more lucrative than just initial costs. However, these services are not additional revenue sources for component suppliers.

Although suppliers have fewer opportunities, they respond to the slower market for smartphones. Like most device makers, Apple prefers at least two suppliers for each component. The combined component of the II-VI and Finisar Corp., a combined $ 3.2 billion announced last week, will create a larger company that can better negotiate prices.

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