iPhone Profit At Risk As Apple Exploits Cobalt Mines
Apple’s plans to get closer to its cobalt suppliers raises an interesting question. What happens when it no longer has easy wins in the supply chain and all the low-hanging profit in the iPhone is gone?
Tim Cook’s reputation at Apple was built on his supply chain management. Highlights included reducing the time that finished but unsold stock remained on Apple’s books, increasing the efficiency of Apple’s shipping operations, and overseeing significant hedging of resources as Apple bought up technology and resources to lock out competing manufacturers.
On Cook’s arrival there was a lot of slack in Apple’s systems, and reducing slack increases profits. In that sense Cook’s management of these issues was the biggest win for the iPhone. Although year-on-year sales have been broadly down for the iPhone since 2015, Apple’s revenue and profit have climbed, due to increasing efficiency boosting margins and the marketplace accommodating higher prices per device.
But removing slack is a one-time option, you are then left with a taut bowstring that is under increasing pressure to deliver. And taut strings have a habit of snapping at awkward times.
Apple has implemented many new features in software over the last few years, but as the iOS package becomes mature and the obvious applications are settled, it’s not as easy to push the edges of the envelope. The easy wins, the slack, has all been taken in. The bugs and errors that are creeping in to iOS that are demanding more time to solve, are symptomatic of a system that is in need of more resources; be it time, engineers, or both. There’s no give left in the iOS department, so something has to break. That broken string is Apple’s yearly tray of goodies at WWDC – the tray will be much smaller this year (but with hopefully less bugs).
Apple’s loss of tight control is also visible in the supply chain. Samsung Display is contracted 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 getting its sales estimate wrong means Samsung has a glut of OLED capability, which will likely mean far more mid-range Android handsets will ship with OLED screens during the rest of 2018. Another key iPhone advantage has been lost through a supply chain that was simply too tight to accommodate fluctuating orders.
Now we read that Apple is looking to shorten the supply chain involved with its use of cobalt – a key ingredient in modern batteries. While there are legitimate concerns about increasing prices of cobalt due to the number of batteries required by electric vehicles, this is Apple playing the same cards on shrinking the supply chain distance and dominating a resource through hedge purchasing. Once you’ve gone direct to the mines then there is nowhere else to go to make your savings. This part of Apple’s empire is now as tight as it can be.
Why is this important? It is a long-term signal that things are changing. When Apple announced its record-breaking numbers for Q4 2017, the share price dropped. Apple continues to have successful run and remains one of the world’s most successful companies, but the potential to maintain its high levels of profit is reducing, trading conditions are not improving, and times are only going to get harder.
Source:- https://www.forbes.com/sites/ewanspence/2018/02/21/apple-iphone-cobalt-battery-supply-profit/#334255654882
