Apple’s Biggest Risk Could Be Its Suppliers

Recent trouble with Samsung is just the beginning

   
Apple’s Biggest Risk Could Be Its Suppliers

apple building looking up 300x227 Apples Biggest Risk Could Be Its SuppliersApple (NASDAQ:AAPL) CEO Tim Cook rose to prominence as a supply chain guy, showing a prowess that helped to secure his position at the head of the world’s most valuable company.

The value of that skill cannot be underestimated — and is only increasing. Raymond Miles of the Hass School of Business makes this point in a Reuters article. He says that Apple may have reached the stage where it needs what Cook offers: “someone with a production vision” and someone who understands this era’s challenges.

Today’s environment is filled with competition for components; shifting alliances; increasingly complex technology in consumer-level devices; and big suppliers who face economic hardship and the demands of global market.

Apple uses over 150 different suppliers, although a few big ones tend to dominate. When those key relationships encounter bumps, Apple’s bottom line can suffer.

Such a reality comes with a new sense of urgency in the wake of Apple’s relations with Samsung, which is now deteriorating amid lawsuits. Samsung still remains one of the company’s largest component suppliers, but Apple is reportedly looking for alternatives where it can.

Even so, Samsung isn’t the only point of concern in Apple’s supply chain. Have a look at some of the core components Apple relies on, the companies it buys from and risks associated with them.

Displays

According to IHS iSupply, LG Display (NYSE:LPL), Japan Display and Sharp are sharing production of the iPhone 5’s display. Of the three, Sharp has been in the news frequently, with its manufacturing challenges being blamed for delays in iPad and iPhone 5 shipments. Last week, Sharp again made headlines as it revealed a $3.11 billion quarterly loss and full-year losses nearly double projections. The news put the company’s future in doubt.

Japan Display, in the meantime, is a partnership that merged the small LCD display operations of three Japanese electronics giants: Sony (NYSE:SNE), Toshiba and Hitachi. LG Display, originally a partnership between LG Electronics (maker of smartphones that compete against the iPhone) and Koninklijke Philips Electronics (NYSE:PHP), is one of the world’s largest LCD suppliers, trailing Samsung.

The LED displays used by other Apple products such as iMacs and MacBooks have typically been manufactured by Samsung, LG and Sharp. And despite indications prior to release that Apple was trying to ditch Samsung as a supplier for the iPad Mini display, teardown of production models confirm Samsung is making the part.

Processors

Apple’s desktop and portable computers currently use Intel (NASDAQ:INTC) processors across the board. For its mobile devices, Apple has used ARM (NASDAQ:ARM) designed CPUs that are manufactured by Samsung.

However, it has been purchasing its own chip design expertise (it bought P.A. Semi, Intrinsity and Anobit) and the iPhone 5 appears to be using an Apple-designed CPU with an ARM architecture license. Speculation has ramped up significantly that Apple is now negotiating with Taiwanese semiconductor manufacturer TSMC about shifting production of its ARM processors from Samsung to TSMC.

DRAM and NAND

Memory is another big component in Apple products — and another area where Samsung has been a major supplier. Back in May, when news broke that Apple was switching from Samsung to Japanese supplier Elpida (a company that was in bankruptcy talks at the time)  for DRAM in the iPhone 5, Samsung shares dropped 6%. That knocked $10 billion off the company’s market cap.

Besides Samsung and Elpida, Apple also buys DRAM from SK Hynix and Toshiba.

Assembly

Taiwan’s Foxconn is Apple’s primary assembly partner, the company whose Chinese and Brazilian factories are responsible for putting all the components together and shipping out iPhones, iPads and others. Foxconn also assembles products for a range of other manufacturers including Microsoft (NASDAQ:MSFT), Nokia (NYSE:NOK), Amazon (NASDAQ:AMZN) and Sony, but Apple reportedly accounts for between 40% and 50% of its revenue. Foxconn has seen heat over its labor practices, worker unrest and has had to hike wages.

Of course, there are many other components that make up Apple’s devices, from the aluminum enclosures of its PCs to the wireless chips in its mobile devices to hard drives, cameras and graphics cards. But the ones spiked out here tend to be among the most volatile.

The Bottom Line

Add in additional variables — consumers showing preference for one display panel brand over another (and actively looking for ways to distinguish this on Apple’s boxes), competitors who are vying for the same components from the same manufacturers, the risk of parts shortages when component suppliers are concentrated and suffer downtime (such as the flooding that hit hard drive manufacturers in 2011), the fact that some of the tech world’s most poorly performing companies (Sony and Sharp, for example) build key components — and Apple’s complex relationship with its suppliers seems like even more of a balancing act.

It also illustrates the challenge Apple faces in any effort to distance itself from Samsung. Its “frenemy” is involved in so many aspects of Apple’s business that removing it from the equation altogether may not be possible — and every shift from Samsung (an established, profitable supplier) to a lesser known or troubled alternative such as Sharp or Elpida adds more risk for Apple.

In the end, even a quick glance at this very simplified look at Apple’s supply chain reveals the challenges inherent in it — and the value of having Tim Cook leading Apple at this time.

It took Steve Jobs’ design and marketing genius to get Apple to the top, but it’s going to take Cook’s supply chain management expertise to keep it there.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/11/apples-biggest-risk-could-be-its-suppliers/.

©2014 InvestorPlace Media, LLC

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