Apple suppliers suffering as iPhone demand wanes
In a world where iPhone demand is on the wane, Apple has a Plan B.
As customers wait longer between upgrades and the smartphone market saturates, Apple can fall back on charging higher prices for each handset and raking in more money from services such as streaming music, digital videos and data storage.
But there’s no back-up for many of the companies that supply components for the iPhone.
Japan Display Inc., which gets more than half its revenue from the iPhone maker, cut forecasts. Then Lumentum Holdings Inc., a top maker of iPhone facialrecognition sensors, lowered its second-quarter outlook. Hon Hai Precision Industry Co., the biggest assembler, also missed estimates.
“Suppliers are more dependent on volume than Apple,” said Woo Jin Ho, an analyst at Bloomberg Intelligence. “This raises an incremental risk for the rest of the supply chain.”
Faced with a maturing smartphone market, Apple’s strategy has been to entice customers to pay more for phones with new features such as facial recognition and more vibrant screens.
The 3-D sensing components from companies like Lumentum are found in iPhones that often cost more than $1,000. Fewer people can afford to pay that much for a new device.
But when a sale does happen, suppliers get a one-time payment for their component, while Apple can generate hundreds of extra dollars per gadget.
In its most-recent quarter, Apple reported almost no increase in the number of iPhones sold, but revenue from that business jumped 29 percent from a year earlier.
If demand for newer, pricier iPhones wanes, Apple can cut component orders, or delay shipments, leaving suppliers with more inventory. That makes them more likely to cut prices when Apple comes back to the negotiating table.
Apple is increasingly touting its base of 1.3 billion installed devices, rather than how many iPhones it sells each quarter. And the company has been making changes to keep these existing customers happy while selling more services to them.
“Apple is no longer a traditional hardware business,” said Gene Munster, a veteran Apple analyst at Loup Ventures. “The Apple investment paradigm is moving away from a focus on device sales toward a more predictable servicesdriven business.”
This year, Apple has taken steps to lengthen the amount of time iPhones can be used. That will likely discourage people from upgrading to newer devices — another ominous sign for suppliers.
With longer-lasting iPhones, users may be more likely to subscribe to new services, making the devices more lucrative to Apple than just the upfront cost.
But these services are not additional revenue sources for component suppliers.