China and the US have seen their smartphone market blossom and mature, all in the course of a decade. As innovation in the industry starts tapering off, customer upgrade cycles have lengthened, as handset makers offer marginal feature upticks every year.
Research from the International Data Corporation (IDC) has revealed that the worldwide smartphone market is in a state of perpetual slowdown. Data suggests that 2015 was the last year that the smartphone market experienced any double digit growth. Additionally, IDC projects that 2016 will see 1.5 billion worldwide smartphone shipments, only a 5.7% growth over 2015.
If this wasn’t enough to knock
In response to these complaints, CEO Tim Cook told investors at the previous earnings call that the drop had very little to do with a lack of innovation at Cupertino. Instead, Mr. Cook attributed the shortfall to ‘harsh’ macro-economic conditions and unfortunate placement of the launch in terms of upgrade cycles.
Moreover, worsening of iPhone’s average selling price (ASP), with the addition of budget models, could continue to put a dent in the company’s margins. A shift towards phones like the iPhone SE, which was released in March and costs $399 to $499, means an unfavorable marketing mix for Apple going forward.
So What Does This Mean?
The implications of Apple’s recent developments will undoubtedly trickle down the supply chain as the company’s vast arsenal of suppliers rush to secure their positions in the narrowing formation. An elongated upgrade cycle coupled with underperforming ASPs are a powerful indicator of slimming gross margins.
In a bid to keep its gross margins from drowning further, Apple has repeatedly sent out reduced volume order to its existing upstream suppliers. Recent reports have also suggested that the smartphone behemoth might be on the prowl for component suppliers that could prove lighter on its financials.
According to sources, several Taiwan-based assemblers such as Foxconn, Largan and
To make matters worse, there is no lack of competition for these suppliers. Previously,
Credit Suisse today pointed out that Apple’s ‘food chain’ has seen a fair amount of weakness as Analog Devices, Skyworks Solutions and Cirrus Logic have all underperformed in the day’s trading session. Skyworks was downgraded at Pacific Crest this morning over weakness in the semiconductor market. This came after a week of caution raised by Mizhuo Securities over Apple’s stock as the analyst downgraded both Skyworks and Qorvo.
In a nutshell, the worries surrounding Apple are rooted in a soft outlook for iPhone sales over the coming quarters. Consequences of the iPhone’s decline are shaking down Apple’s food chain as component suppliers look towards alternate smartphone manufacturers for growth and diversity. Skyworks for example, earns over three quarters of its revenue from sales to Apple. The prospect of increasingly fierce competition from other players in the industry, along with reduced overall demand from Apple, might lead these component makers to falter in a commoditized market.
For Apple, this means that some suppliers might end up losing their ‘point of bargain’ which could result in lower pricing for components and in turn boost the iPhone maker’s gross margins. The iPhone 7 will be the newest reiteration of Apple’s flagship product but will probably not include as many major design upgrades as its predecessors already has analysts calling for an underwhelming holiday season later this year. An overall slowdown in the emergence of new models and upgrades could also prove to damage the already flattening demand for the iPhone.
By: Muqeet Khan
