Thursday, 22 February 2018

iPhone Profit At Risk As Apple Exploits Cobalt Mines

Apple's plans to approach its cobalt suppliers raise an interesting question. What happens when you no longer have easy profits in the supply chain and all the low profits on the iPhone are gone?

Tim Cook's reputation at Apple was based on the management of his supply chain. Highlights included reducing the time it ended, but unsold stocks remained on Apple's books, which increased the efficiency of Apple's shipping operations and oversaw significant resource coverage as Apple acquired technology and resources to block competing manufacturers.

Upon arrival, Cook had a lot of slack in Apple's systems, and the reduction of the slack increases the profits. In that sense, Cook's management of these problems was the biggest victory for the iPhone. Although sales year after year have declined sharply for the iPhone since 2015, Apple's revenues and profits have risen, due to the increased efficiency that drives margins and the market that accommodates higher prices per device.

But eliminating the slack is a one-time option, so you are left with a tense arc cord that is under increasing pressure to deliver. And the tense strings have the habit of breaking in difficult times.

Apple has implemented many new features in the software in recent years, but as the iOS package reaches maturity and obvious applications are resolved, it is not so easy to push the limits of the envelope. The easy gains, the slack, everything has been absorbed. The errors and failures that are infiltrating iOS that demand more time to resolve are a symptom of a system that needs more resources; either time, engineers or both. There is nothing left in the iOS department, so something has to be broken. That broken string is the annual tray of Apple treats at WWDC: the tray will be much smaller this year (but with fewer bugs).

The loss of control of Apple is also visible in the supply chain. Samsung Display is hired by Apple to supply the OLED panels for the iPhone X, so the reduction of orders in Q1 2018 from 40 million to 20 million leaves Samsung with an excess of production and stock. Apple is wrong with its sales estimates, which means that Samsung has an OLED overcapacity, which will probably mean that more mid-range Android phones will be sent with OLED screens for the remainder of 2018. Another key advantage of the iPhone was lost through a supply chain simply too tight to accommodate fluctuating orders.

Now we read that Apple is looking to shorten the supply chain related to the use of cobalt, a key ingredient of modern batteries. While there are legitimate concerns about the increase in cobalt prices due to the number of batteries required by electric vehicles, Apple is playing the same cards by reducing the distance of the supply chain and dominating a resource through the purchase of coverage. Once you have gone directly to the mines, there is nowhere else to go to make your savings. This part of Apple's empire is now as close as it can be.

Why is this important? It's a long-term sign that things are changing. When Apple announced its record numbers for the fourth quarter of 2017, the share price fell. Apple continues to be successful and remains one of the most successful companies in the world, but the potential to maintain its high profit levels is shrinking, business conditions are not improving, and times will be increasingly difficult.

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