Post-Japan, Apple faces flat growth quarter?

By Jonny Evans

iPhones, iPads and other Apple [AAPL] products may be harder to get than usual as the impact of the terrible tragedy that hit Japan in March begins to be felt across the company's supply chain. Confounding the problem it seems finding enough workers to help meet Apple's aggressive iPad 2 and iPhone production orders is also challenging.

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Apple aims for 20-22 milllion iPhone sales

Apple hopes to sell 20-22 million iPhones in the second quarter of 2011 (an aim that's over 7 percent up on Q1's 18.6 million). This is piling pressure on the company's manufacturers, Foxconn and Pegatron Technology, causing their deadlines to whoosh by.

Apple has not yet booked component orders for the mythical next-gen iPhone 5.

Things remain challenging in Japan. "Despite both upstream and downstream PC and smartphone players claiming to have not seen any component shortages and that they will see normal supplies until the end of May 2011, sources from upstream component players have pointed out that Asustek Computer, Acer, Motorola, Apple, High Tech Computer (HTC), Quanta Computer and Compal Electronics have all recently started acting aggressively in securing supplies of MLCCs, PCBs and cover glass for touch panels due to warning signs of shortages," reports Digitimes.

These claims match what I've been hearing.

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I met with hard drive manufacturers yesterday. I won't name them here, but our chat included discussion of the impact of the disaster in Japan on their supply chains. They confirmed component supplies to be constrained across many tech industry sectors.

Component inventories are running dry

Anyone who has been watching/listening to Apple financial reports will be familiar with the concept of inventory, and that the company typically has just a few weeks of inventory in hand at any time. This reduces exposure to market fluctuations and helps ensure models in the supply chain remain up-to-date.

The same deal applies across other parts of the industry, and the hard drive people I spoke with described a situation in which most component suppliers maintain inventories between 6-8 weeks in size. In many cases, inventories (stocks) of some key components were wiped out, along with the factories which made them, when the post-quake tsunami hit Japan.

We've reached the end of most existing component inventory now, as it has been around 8 weeks since the disaster. This means the industry is beginning to see a truer picture of the extent of shortages across component chains.

Don't neglect that some extremely specialized components are in short supply. These could be essential for manufacturing of sundry different additional components, so a shortage of one thing can impact production of many things, creating a domino effect.

Complex challenges

There have been plenty of attempts at every level of the industry to find new suppliers for some components, but even where these have been found, the new suppliers may not yet have had sufficient time to build-up their production lines to meet these new levels of demand.

Apple has played it cool so far, at least in public.

The company stressed the unpredictability of the situation during its most recent financial results call, when COO, Tim Cook, explained that Apple,

"...sourced hundreds, literally hundreds of items from Japan, and they range from components such as LCDs, optical drives, NAND Flash and DRAM to base materials such as resins, coatings and foil that are part of the production process at several layers back in the supply chain. The earthquake and subsequent tsunami and the associated nuclear crisis caused disruption for many of these suppliers, and many unaffected suppliers have been impacted by power interruptions. But since the disaster, Apple employees have literally been working around the clock with our supplier partners in Japan, and have been able to implement a number of contingency plans. Our preference from the beginning of this tragedy has been to remain with our long-term partners in Japan. And I have to say, they have displayed an incredible resilience that I personally never seen before in the aftermath of this disaster. So while we do not anticipate -- currently anticipate any material impact to our component supply or cost in our fiscal Q3, we do need to caution everyone that the situation remains unpredictable given recent aftershocks, the uncertainty about the nuclear plant and potential power interruptions...although we know of no issue today that we view as unsolvable, the situation is still uncertain and there's obviously no guarantees."

(Sourced from the splendid people at Seeking Alpha.)

No guarantees, indeed. But this could be smoke and mirrors.

Digitimes notes, "Sources pointed out that PC- and smartphone-related players have all claimed to have not seen any supply issues after the earthquake because of concerns that it might cause upstream players to panic and even raise their product prices, while trying to prevent the subject from impacting their new product launches. However, most of these makers have all been working on stocking their component inventory behind the scenes, the sources added."

Beware, the ides of..June?

The report notes that many component suppliers are close to suffering shortages, adding "with the real challenge expected to hit in June".

Other side effects may include higher than usual levels of production of defective products and rising manufacturing costs. Semiconductor production is also likely to be negatively impacted by Japan's power brownout policy, as the country grapples with major loss of electricity production facility.

Second quarter shipments of iPad 2 and iPhone 4 face "a shortage of both labor and materials" at Foxconn’s Chengdu, China plants, Digitimes claims.

"Most market watchers have estimated that total iPad 2 shipments in the second quarter will reach as high as seven million units, but since Apple is trying to reach its shipment goal of 35-40 million units for 2011, the company has been pushing its upstream partners to aim at supplying 10-10.5 million units in the second quarter, the sources added."

It won't just affect Apple

So, as we can see, the situation as it impacts Apple threatens to limit sequential growth in unit sales of some key products, and means iPad supplies will remain constrained for some time.

I suspect -- but cannot prove -- that this may lead to relatively flat growth in Apple's current quarter, though iMac sales should help.

I anticipate the situation will be far worse for most Apple competitors, with the possible exception of those who also own their own manufacturing plant, such as Samsung.

Signing off, here's an amazing fact for the day. Remember when we talked about the 'CrackBerry' people -- BlackBerry users permanently connected to their device? Well, now we're all at it, with a recent Ericsson survey revealing that 35 percent of Android and iPhone owners in the US use apps such as Facebook on their device before they get out of bed.

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.      

Copyright © 2011 IDG Communications, Inc.

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