iPhone 5 component supply challenges could threaten Apple's empire

The bigger you become, the bigger the problems you face. History shows that every empire reaches a point at which its infrastructure begins to become stretched, after which it tends to shrink. Resource allocation is important, and it seems Apple [AAPL] may be facing a few problems in this.

[ABOVE: Today's claimed iPhone 5 spotting.]

Component supply could challenge future growth

Recent reports claimed Sharp has been delayed in delivering new displays for the iPhone 5. A report this morning once again speculates the deal between Sharp and Hon Hai/Foxconn has hit several hurdles, leaving the Japanese company with no choice except to mortgage all its domestic offices and factories in order to remain in business until that deal is done.

The mobile industry has become far more diverse in the last 18 months, with Android device makers now offering huge orders to component suppliers. In the case of many components, such as Wi-Fi and 4G radios or flash memory, Apple and other manufacturers are chasing supply from the same source.

The battle between Samsung and Apple continues and while the Korean firm is astute in ensuring the fate of its mobile arm doesn’t impact its supply deal with Cupertino, Apple’s attempts to replace Samsung as processor supplier with TSMC also appear to have failed. This means Apple continues to account for around 8 percent of Samsung’s business.

Apple management have previously claimed each generation of iPhone sells approximately double the total amount of the previous generation. In the case of iPhone 5, this leaves the company attempting to source components for some 170 million devices in the next 12 months.

That’s great news for Apple and for component suppliers, but intense competition in the industry means demand for key components is at an all time high. Apple CEO Tim Cook is known for cutting tight deals with suppliers, exploiting the company’s focus on a few products to launch good deals for large quantities of inventory. 

Pulling the chain

However, with a larger church of manufacturers chasing up similar components, Apple suppliers have options if they choose to find more lucrative deals. This is leading the company to widen its supply chain

These ideas are supported by Apple’s well-recorded struggles to replace Samsung at many levels of its component supply stream. That the company has so far been unable to completely replace its smartphone foe hints that there’s a finite limit to component availability.

This is likely to impact iPhone production. Responding to this KGI Securities analyst Ming-Chi Kuo last week reduced his forecast on iPhone shipments from 147.6 million to 130.6 million units on strength of component supply problems. The analyst also reduced iPad estimates from 67.6 million to 66.3 million units and Mac shipments from 18.8 million to 17.6 million units.

Apple continues working to increase component supply. Analysts at Pacific Crest claim: “iPhone 5 component supply and yields are improving materially.”

Problems sourcing components in sufficient quantity may impact Apple’s plan to accelerate launch of its new product to international markets. They may also undermine the company’s plans to launch the device via China Mobile, which could also impact future growth.

Growth problems

Assuming the company is able to circumnavigate these purported supply issues, things look great for iPhone 5. A Techbargains survey of 1,332 people found that 22 percent of Android users and 38 percent of BlackBerry owners intend purchasing an iPhone 5 as soon as it goes on sale. 64 percent of iPhone 4S owners also plan an iPhone 5 purchase.

Beyond component supply challenges, Apple’s plan to expand into television also appear to be in trouble. Despite the company’s seven-year effort to convince media and cable companies to loosen their grip on the television industry, talks so far have failed to bear fruit.

Apple, Google, Microsoft and Amazon have all been struggling to reinvent television, but they face stumbling blocks of all times in their negotiations with the complex and mature industry. This means any Apple television product isn’t now likely to appear until next year, if at all. 

“If I’m a cable company, do I really want to let Apple into my house?” Jason Hirschhorn, the former chief digital officer at MTV and co-president of MySpace told Bloomberg.

Has Apple reached its limit?

Summing up, while millions worldwide will queue to pick up an iPhone when it appears, the company’s growing problems sourcing components  for its devices may form a ceiling to the empire’s expansion. Solutions to this may include establishing its own component production lines. Is it possible Foxconn’s plans to expand its production facilities in Brazil might be part of the response?

For Apple the challenge is also that with the smartphone industry at its most competitive the company needs to build its marketshare rapidly in order to avoid losing face to its Android rival. A perceived failure to achieve that, or problems meeting consumer demand, may well cast the company in the role of a small player in the smartphone space. 

There’s no doubt in my mind that this isn’t what the company wants to let happen, leading me to predict a spate of future M&A activity on behalf of Apple and its manufacturing partners designed to support its parts supply.

Got a story? Drop me a line via Twitter or in comments below and let me know. I'd like it if you chose to follow me on Twitter so I can let you know when these items are published here first on Computerworld.

Also read:

From CIO: 8 Free Online Courses to Grow Your Tech Skills
Join the discussion
Be the first to comment on this article. Our Commenting Policies