In a Maturing Smartphone Market, Apple Will Be Fine. It’s Suppliers? Not So Much.
Investors may not like it, but the smartphone market is maturing. For a while there, the idea of upgrading every single year in order to get the latest and greatest features available was a no brainer. But in 2018, with a more cost-conscious consumer base, and a smartphone segment that’s all but tapped out from a technological innovation standpoint, we’re more willing to hold onto the device for longer stretches at a time.
Apple recognizes that, and that’s exactly why they’ve been making moves to position themselves to survive in such a world. You can see that in their decisions to create pricier phones, knowing that they’ll capture a greater average selling price upfront while consumers hold onto the device for longer. And they’re placing greater emphasis on turning the smartphone it a recurring revenue generator through things like Apple Music and other add-on services. And if that wasn’t enough, their lack of concern over the maturing smartphone market became abundantly clear in their decision to stop reporting the volume of iPhones sold each quarter—a move that analysts have fretted over, but that the company called necessary because of the figure’s increasing lack of relevance.
But it extends beyond that. Apple’s decision to open iOS 12 support up to 28 of its active devices is an unprecedented one. No previous version of the mobile operating system was that far-back reaching. Additionally, the company (albeit under excruciating public pressure) offered cheap battery replacements for older devices after it admitted to throttling them in order to extend their life.
So, bottom line, Apple will be fine.
The same, however, cannot be said for Apple’s suppliers. Recent analysis from Bloomberg showed just how reliant some of those iPhone parts-supplying manufacturers are on Apple’s business.
“Suppliers are more dependent on volume than Apple,” Woo Jin Ho, an analyst at Bloomberg Intelligence, said in the report. “This raises an incremental risk for the rest of the supply chain.”
Three such examples include Japan Display Inc., (which gets more than half of its annual revenue from Apple), Lumentum Holdings, Inc., (one maker of Apple’s facial-recognition sensors), and Hon Hai Precision Industry Co., (one of Apple biggest assemblers). All three companies either cut their forecasts or missed recent projections within the last week, and all three saw their market cap plummet as a result. Whereas Apple was down around 5 percent Monday, at the time of the Bloomberg report, its suppliers were down 30 percent (Lumentum), 10 percent (Japan Display), and reached its lowest level in two years (Hon Hai).
The impact will reverberate over time for these companies as well, not just during a period of slowing demand. The report notes that as Apple cuts its own sales forecast, impacting orders already made through its suppliers, those companies are then left with more inventory than they anticipated having. In turn, Apple will likely come to them and expect to see the prices for those components cut the next time around—something suppliers will happily oblige with just to get the excess supply of components off of their hands.
For Apple, the move to extend the life of its smartphones is one that will play well with consumers. But for suppliers? No telling if they’ll be able to survive the long winter that’s surely coming.