"All Components Face Price Pressure" - Apple Forces Suppliers To Accept Price Cuts, As JPM Cuts Production Estimates

Tyler Durden's picture

In the latest confirmation that the long-awaited rebound in demand for AAPL products keeps getting delayed, even as a surge in low-priced Chinese competition continues to steal market share, overnight the WSJ reported that the tech giant is forcing its suppliers to accept both price cuts and volume reductions in order to preserve profit margins: "as Apple Inc. grapples with falling iPhone sales this year, it is pushing to cut better deals for parts with its suppliers, while carriers in the crucial China market have mobilized to push iPhone sales with deep discounts. In recent months, Apple suppliers say the Cupertino, Calif., company has told them to accept price cuts for parts destined for the next-generation iPhone while cutting forecasts for order volume. This is likely to hurt some suppliers’ earnings in the second half of the year."

And while AAPL is preparing to wage tax battle in Europe, it is engaged in a far more critical for its future profitability war in China, where in the past two weeks, China Telecom has started selling unlocked 16-gigabyte iPhone 6s models for 4,288 yuan (US$642), based on checks at its retail outlets, the WSJ reports. That is below a price of 5,288 yuan listed on Apple’s China website. Rival carriers China Mobile and China Unicom Corp. have also offered fresh iPhone discounts, although they aren’t as steep as China Telecom’s. In the U.S., major telecommunications operators sell the unlocked 16-gigabyte iPhone 6s for US$649.

While carriers typically discount iPhones before new-model launches, it is rare for iPhones to be cheaper in China than in the U.S., as a combination of import duties on components and value-added taxes boosts prices.

While Apple's recent woes in China are nothing new, these moves highlight the difficulties Apple faces to shore up demand for its products as global demand slows and upstart Chinese companies become serious rivals. As a reminder, in Q3, Apple’s profit slumped 27% from a year earlier amid weaker sales especially in China. Meanwhile, Samsung, its biggest rival, reported its most profitable quarter in two years in the second quarter as it got a head start on shipping its latest Galaxy S7 smartphones.

Worse, by forcing its supply-chain to "eat" the decline in top line growth in order to preserve margins, Apple risks alienating key suppliers as well as adversely impacting their own supply-chains and operations, resulting in further production delays.

But the biggest surprise is not the price cut demands, but the corresponding volume declines: according to the WSJ, suppliers say this year Apple pushed to cut both component prices and order volume. The company told suppliers that despite the volume cuts, orders would rise significantly after new-device launches. But given that iPhone sales have been falling this year, suppliers say they are wary about betting on a smash hit. The demands for discounts have irked some suppliers, many of whom get a large proportion of their sales from iPhone parts.

“The reason why everybody is extremely unhappy about it recently is because they played a ‘double cut,’ cutting both the price and the volume of orders,” said a person at one of Apple’s suppliers.

While the ongoing cuts may help boost near-term results, over the long run AAPL's strategy is likely to backfire: analysts say the discounted parts will likely help shore up Apple’s earnings in the second half, but damp profit outlooks for suppliers including iPhone assembler Foxconn Technology Group, metal casing manufacturer Catcher Technology Co. and chip-processing company Advanced Semiconductor Engineering Inc. While a few hard-to-replace Apple suppliers have strong bargaining positions—such as chip maker Taiwan Semiconductor Manufacturing Co. and camera lens module maker Largan Precision Co.—Apple has multiple sources for other components, giving it leverage to seek better prices.

Negotiations over cuts in component prices started in January, suppliers said, and have already begun to affect earnings figures for Apple and parts makers. The price cuts helped Apple beat analysts’ estimates in its latest quarter, analysts said, with gross margins coming in at 38%, in line with its estimate of 37.5% to 38%. Apple has forecast gross margins of 37.5% to 38% for the current quarter that ends in September.

 

Some component makers say Apple told them it could cultivate less-costly Chinese suppliers if they didn’t accept the price cuts.

 

Apple generally cultivates several secondary suppliers for each component, except for a few important parts—such as the processor—for which it is hard to find alternatives given the complexity in manufacturing.

 

“With global smartphone growth slowing, Apple needs to find a way to maintain its high gross margins,” Fubon Financial analyst Arthur Liao wrote in a note in July. “In our discussions with…the supply chain for the iPhone 7, all components except [the camera lens] face price pressure.”

Finally, adding insult to injury, in related news moments ago JPM analyst Narci Chang released a note in which he warned of "hiccups" in iPhone 7/7 Plus production, and cut its iPhone 7 production estimate for H2 to 70mm, down from 85-90mm last year for new models. 

Based on our recent supply chain visits, we believe there could be supply hiccups at certain components (i.e. display BLU, casing, and EMS assembly); hence we expect some modest change to iPhone production build. Our expectation of iPhone 7/7 Plus build in 2H16 is now approaching 70mn units, down from 85-90mn level last year for new models, also down slightly from our previous expectation of 75-80mn units. However, total iPhone build stays roughly unchanged at ~110mn units in 2H16, suggesting strength in iPhone SE. For total iPhone production build, we now expect 45mn in 3Q and around 65mn in 4Q, respectively. Upside risks include (1) Impact from Apple Upgrade Program and (2) More Apple Store openings. New iPhone unpack event is scheduled for September 7, 2016.

 

Should this adverse trend continue, Tim Cook may be forced to do the unthinkable, and begin considering broader iPhone price cuts around the world, not just China, something which many have warned over the years, could be the beginning of the end for the company's heretofore untouchable business model.

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SomethingSomethingDarkSide's picture

High End Real Estate Crash and  EU Tax Grab - The Powder Keg and Ignition of 2016.

The Merovingian's picture

Apple using same tactics as Walmart. They are not innovators, they are low cost producers who are running out of cheap labor and cheap parts for their crappy stuff. All of their shit has a 3 year shelf life MAX. Then it starts breaking ... often badly and irreparably.

Full disclosure, we own and use iPads, my works mandates I have an iPhone for their purposes, and I have a Mac mini that I had to gut and rebuild recently. Back your shit up regularly, because sooner or later it will lock up on you and it will cost you a couple grand to even TRY to get you treasured selfies back if you didn't back up your HD.

Antifaschistische's picture

well, I think the world still has plenty of cheap labor.  The problem with all the i gadgets is that they are going through the same technology cycle as every single other piece of technology has for the past 1,000 years.  At some point in the future, in our lifetimes, we will be laughing unbelievably telling "way back then" stories about people who paid more than $100 for the i-gadget.  That's just the way it works.  it always has.  

The interesting part to watch will be the decline of AAPL as a stock price.  not as a company, but just as one of the most pumped stocks in the history of the markets.  It will end a lot of parties.  Because everything is on a bubble, it's hard to predict what will happen to the lavish AAPL campuses.  They can't get converted into a University, when Universities are also riding giant bubbles.  only time will tell.

NotApplicable's picture

Is there anything left supporting the phone market other than carrier incentives? Given most lock you in for two years, how can there be any demand left?

At what point will the carriers go upside down from this cannibalism?

And most importantly...

How much does Ole Yellen care?

SomethingSomethingDarkSide's picture

One thing in the Cellular Corner of The Ring is that I certainly would opt for porn in my hand than on a laptop.

I do not believe that I am alone in this mentality.

Panic Mode's picture

Apple, I'm still using iPhone 4. Bite me.

cowdiddly's picture

Apple forces suppliers to cut cost. AHHHAHAHAHHHAH

The Wally World of cell phone makers.

Infield_Fly's picture
Infield_Fly (not verified) Sep 1, 2016 9:44 AM

Apple's stock is going to be just fine.

 

CBs will just buy up 100% of the shares - see??  All good.  Everything is fixed.

Antifaschistische's picture

LOL, yes, and they will trade 1 share amongst themselves on a daily basis for $1000 per/share to keep the market price where they need it to be.

Hal n back's picture

LOL--I can just see the SNB as majority shareholder

withglee's picture

the tech giant is forcing its suppliers to accept both price cuts and volume reductions in order to preserve profit margins: "as Apple Inc. grapples with falling iPhone sales this year, it is pushing to cut better deals for parts with its suppliers,

The parent eats its children. The parasite eats its host. How they doing on the "demand" on government to forget its tax claim. This is just big fish eating successively smaller fish.

Consuelo's picture

 

 

If you have been around Silly-Con Valley since the 80's, you know when you fuck with suppliers like this for any length of time, where it eventually leads...

 

Finish that Panopticon Tim - FEMA and the DHS are gonna need it pretty soon...

buzzsaw99's picture

i'm sure the parts quality won't suffer. lulz

Spungo's picture

I was just about to say that. Remember when people were complaining about the iphone bending? Also remember the thing about losing signal if two sides were touched at once?

Apple cannot afford to fuck around on quality. That's literally the only reason to buy an iphone. They cost 3x as much as an equivalent Android, so quality is expected.

Disc Jockey's picture

Walking into the grocery store the other day it really hit hit me: Other than the cell phone "revolution" what major advancements have we seen in the last 30 years?

Granted tech has gotten faster, cooler, and smarter but really what other life changing inventions have been made?

This really depresses me when during the 20th centutry we essentially went from horse and buggies to beyond earth orbit space travel. Granted, the Internet has also been a huge communication boon, but what has all this brought us? No wonder the economy sucks.

Consuelo's picture

 

 

No advancements...?

 

Showing your friends what you ate for dinner, and the finished product sitting in the toilet bowl, and you say 'no major advancements'...?

Proaurum's picture

I too have thought about this. The 19th and 20th centuries brought huge scientific,  technical and engineering revolutions. The steam engine,  internal combustion engine, electricity, nuclear power.....

What we've seen the past couple of decades has been pathetic in comparison. The internet makes work easier, but it's mostly for entertainment, as as all the new gadgets we see. Fundamentally, a mobile phone is just an extension of what Alexander Graham Bell invented. Yes, you can do more with it but it's basically a device to communicate with others. It doesn't greatly increase productivity but is does allow for more avenues for entertainment

Could we live without mobile phones? Yes. Facebook? Yes. Online shopping? Yes. Netflix? Yes. Electricity? No. The IC engine? No.

pherron2's picture

3d printers are pretty awesome. They've already spurred a lot of innovation, and have potential for much more as they spread out to more inventive people. I'm sure there's a lot more that we are missing here. I don't follow much scientific news, but things like nano tech, quantum computing, etc can only bring exponetial growth in futher innovations.

 

Doom Porn Star's picture

"Other than the cell phone "revolution" what major advancements have we seen in the last 30 years? "

 

IMHO, the mass production of cheap, stable and reliable LED lighting may be the great accomplishmnet of the last 30 years.

Changed over my home from incandescent to LED and my electrical useage dropped by almost 28% instantly.   Same lumens output for roughly 16% to 18% of the electrical input; -and output increasing with technological process and materials innovations.

IF broad implementation of LED lighting was made a national priority of the US it would eliminate the need from hundreds of power plants and reduce emissions by amounts rivalling if not exceeding those of automobile emmissions targeted by CAFE standards.

The US shouldn't be subsidizing luxury electric sportscars for rich fucks to the tune of $7K to $15K per Tesla; -or more if one includes other costs such as pyramided/secondary California style 'Cap & Trade' schemes..

IF the US should be subsidizing ANYTHING relating to energy it should probably be LED lighting.

Such a subsidy would save the populace  -poor and rich, consumer and commercial, alike- after-tax money in absolutely equal proportions to use.  

In effect the transition to LED lighting would be a tax cut for all taxpayers as well as it would lower the costs of lighting ALL government buildings.

It would diminish private/commercial/public energy use and costs, plant and grid costs, disposal costs, environmental costs, etc..

The full retail cost of LED 'bulbs' to completely re-light my 1 bath 3 bedroom home including taxes was less than $250.   

fxrxexexdxoxmx's picture

Switched all of my house and am saving $55.00 a month. Spent $298.00. Six month payback and average 15,000 hour per bulb lifespan.

Archibald Buttle's picture

good point, but i have a 3 word response to why that will never happen: power company profits.

elmo jones's picture

Dear iTrash suppliers. I'll give you 10% more than that faggot cook is.

valley chick's picture

Still using an old flip phone....no desire to buy any igadget.

silverer's picture

Went back to an old flip phone. I started to freak out when I'd go places and everyone had a phone in their face, and they weren't talking to the people right next to them. WTF? It started to actually get scary, like some bizarre sci-fi movie.

valley chick's picture

Exactly. I refuse to become a part of the masses. But then again I have always had critical thinking. :-) 

Mr. Schmilkies's picture

People gawk at my brick phone (Nokia), but it still makes phone calls and is dirt cheap. 

chrsn's picture

Crapple may have to work harder and harder to convince its cadre of sheep how cool and superior its products are

wide angle tree's picture

It's just a phone.

Good luck.

silverer's picture

Apple is now like every other good socialist out there. They want it for free.

elmo jones's picture

TRUMP fone for Vets.

For $1 billion, Trump could have custom phones made for over 10 million Vets.with Encrypted Benefits.

moonmac's picture

Sales History for a standard 300 lb Chinese industrial part. Problem is we bought tons in 2013 for $1,000.

2013 = $3,000

 2014 = $2,600

 2015 = $1,800

 2016 = $1,200

robertocarlos's picture

The consumers are forcing Apple to take a price cut, even with the Samsung 7 delay. 

TheABaum's picture

Sucks to be Apple.. there is no "next big thing". Tim Cook is NOT Steve Jobs. 

Doom Porn Star's picture

Steve Jobs wan't anything special.  He was an avaricious businessman in the right place at the right time.

The Woz created those Apple computers.

The iPod was a knock-off of existing mp3 players already in production by E-Mu and others.

The iPhone was a mash-up of Palm and Blackberry tech.

The iPad is an oversized iPhone.

Beats headphones were and are ghetto bling and don't compare at all to full spectrum high fidelity monitoring devices produced by the likes of Sennheiser, AKG, SONY, etc..

Apple designs most of their products using what are in effect off the shelf parts; just like most other consumer product manufacturers: hence, 'SUPPLIERS'.

TheABaum's picture

Whatever he was, Cook is less.

Professor Know Nothing's picture

Yet the majority of suppliers have been bid up in the face of increased debt and massive inventories. The "everything is awesome" song sings in my head every time I look at these suppliers of commoditized products.

elmo jones's picture


TRUMP fone for Vets to have RF to DC harvesting circuit instead of batteries.

Http://www.mouser.com/applications/rf_energy_harvesting/

May also be available to natural born US Citizens over 65 and select caregivers in WORKFARE program.

Colonel Klink's picture

crApple can get bent.  I'll never buy one of their products.  Fuck'em!