Apple iPhone 5 faces supply constraints as consumer attitude shifts

If you’re one of the thousands of iPhone owners selling their smartphone to make way for the introduction of Apple’s [AAPL] new iPhone (5) then you’d better get ready to make your pre-orders as soon as you can, as it seems possible supply will be constrained.

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[ABOVE: Changewave believes iPhone 5 demand will be huge.]

At the Sharp end

We know there’s huge pent-up demand for the new device. This morning we also learn that as well as a non-win for Apple and non-defeat for Samsung in the Japanese courts, Japan’s Sharp is allegedly behind in its production of displays for the new iPhone.

A Reuters report informs us that Sharp’s fallen behind schedule in its production of displays for Apple’s devices with just weeks to go until the iPhone 5 hits the shops. This could be a problem, though Apple is also understood to be sourcing screens from LG and Japan Display. 

The new 4-inch screens are expected to be thinner than before through use of in-cell panel technology, in which the touch sensors are built-in to the display, rather than being hosted on a layer that’s placed on top of the screen.

Sharp’s been facing problems ramping up production of screens made using the technology since earlier in the year. The Reuters report tells us it continues to struggle, facing high costs which have impacted its margins. 

With Sharp in parlous circumstances as uncertainty surrounds its previously-announced deal with Hon Hai/Foxconn, the company is ill-prepared to make major investments in its plants. In order to secure future supply, Apple may be forced to help subsidize set-up of additional Sharp iPhone display production lines.

Expect short supply

That the initial run of iPhones will be constrained is no great surprise. This has been the situation with each release of the device. While the first-generation iPhone took a quarter to sell its first million units, first weekend sales have grow with each iteration:

  • iPhone 4S first weekend sales exceeded four million.
  • iPhone 4 first weekend sales exceeded 1.7 million.
  • iPhone 3GS sales were over one million in the first weekend.
  • iPhone 3G sales hit one million in the first weekend.

These impressive sales records combined with the hype and hoopla accompanying the iPhone’s release and relatively slow growth in smartphone sales across the most recent quarter suggest the industry will be watching initial iPhone sales closely. A July Changewave survey noted that demand for the device is set to be “strikingly higher than we’ve seen for any previous iPhone model.”

I expect this to be the biggest iPhone launch ever, possibly the biggest product launch ever,” Robert Baird Senior analyst William Power told Bloomberg’s Bloomberg Surveillance.

Apple’s set its own bar high. Testifying against Samsung, Apple’s VP marketing, Phil Schiller, noted that each generation of the iPhone sells approximately as many units as the combined sales of all previous generations. 

Analyst Horace Dediu estimates this means the iPhone 5 will shift 170 million units across the next year. That’s an impressive prediction. It equates to sale (and production) of just over five iPhone 5’s each second.

Global Apple iPhone sales Q3 2012

You will find more statistics at Statista

Will component supply undermine Apple?

With production set to such capacity it seems clear that any delay shipping components to Apple will have a significant impact on its ability to meet demand.

Apple’s problem as it engages in its platform war with Google’s Android OS is that iOS sales appear relatively flat. iOS smartphones now account for c.20 percent of the market, with Google’s OS grabbing over 60 percent, according to Statista/Gartner

This environment means Apple will be under great pressure to manufacture its slim, thin, smaller and bigger iPhone 5 in huge quantities. The company really doesn’t need its suppliers to fall short in terms of component manufacture at this point in the war. 

There’s a lot to play for -- smartphone use in the US is expected to reach 192.4 million by 2016 (eMarketer). All players in the space want to grab as much of these sales as possible. J.P. Morgan analyst Mark Moskowitz believes the new iPhone will be the leading smartphone in 2013.

The proxy smartphone war between Apple and Google is becoming increasingly confusing. It’s unlikely consumers see this litigation as an inducement to purchase these devices, potentially creating an opportunity for Microsoft to grab share in the sector. The legal battle is driving people to become partisan regarding their platform choices.

The ugliness of the debate (and I’ve not been blind to the almost personal attacks levied within comments by some Android fans in reaction to any observation that isn’t completely pro- their platform on reports all across the Web) is inevitably tarnishing Apple’s reputation.

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[ABOVE: This morning's YouGov BrandIndex survey reveals shifts in attitude to Apple devices.]

Shifting business

This is leading to some strange shifts in consumer behavior. For example, a YouGov BrandIndex report released this morning reveals that over the past month the iPad has overtaken the iPhone in overall popularity and in the ‘Value’ and ‘Recommendation’ categories. 

This overtaking of the iPhone by the iPad is a reversal of the usual patterns which have seen the phone traditionally well ahead of its tablet counterpart on all the measures highlighted since before the beginning of 2012.

Apple executives may be alarmed at the declining pattern of UK public perception of its flagship smartphone. UK consumers are less likely to recommend the device than they were at the beginning of the year. The good news -- particularly as the company plots its course toward October’s iPad mini -- is that the iPad is soaring in perceived value. 

It’s clear though that any declining interest in the iPhone is a sour note -- should that impact iPhone 5 demand in the first quarter then Apple will face a huge problem. A problem that may translate into further litigation against the company Apple sees as responsible for limiting its success: Google.

Give peace a chance

With this in mind it is perhaps no surprise that high-level talks between Apple’s Tim Cook and Google’s Larry Page have begun. Many hope these will be a prelude to a peace accord of some kind, however, on previous form, the discussions could simply be polite chatter before direct war between the two firms.

Any extension of hostilities would be a shame. Ask any General and they will let you know that wars are wasteful of resources and lives, and should only be launched when there is no other solution. The question Apple and Android fans alike should really be asking is, perhaps, not “who is right?”, but instead, “Is there a sensible way to settle the dispute?

Given that most observers expect all sides will eventually sit down and reach cross-licensing agreements to end these battles, surely it’s worth all parties engaging in some form of dispute resolution now, rather than later, perhaps then passing the inevitable billions of dollars saving in legal disputes on to a smartphone-hungry public.

Do you think resolution makes sense? Let us know in comments below. 

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