The Global Chip Crisis Is a Blip for Mighty Apple

(Bloomberg Businessweek) -- The havoc besetting global trade is lapping at the feet of Apple Inc. The world’s most valuable company looks set to cut production targets for its new flagship smartphone, the iPhone 13, by 10 million units, Bloomberg News reported on Tuesday.

That even Apple is feeling the supply chain ructions reveals the extent of the problems. But it also underscores the mastery that Apple wields over that supply chain.

Because if you unpick the numbers, the actual impact on the company will be far from cataclysmic. Indeed, the stock closed just 0.9% lower after the scoop.

Back in July, Bloomberg News’s Debby Wu and Mark Gurman reported that Apple had ordered as many as 90 million of the new iPhones from its contract manufacturers – companies like Pegatron Corp. and Foxconn Technology Group that assemble the device on its behalf. That would have been a 20% increase from the 75 million units that it has typically ordered in previous years.

So even with 10 million fewer iPhones available, Apple may still be producing about 80 million iPhones, slightly more than it did last year when it released the iPhone 12. Given that the iPhone 13 is a less significant update than its predecessor, that’s not bad going at all.

You see, Apple usually orders far more devices than it expects it will need, giving it some wiggle room. If more people want iPhones than expected, it has the capacity, but it can reduce the size of its orders if that doesn’t happen, and often does so. Conversely, it has a buffer should there be supply impediments, as Bloomberg Opinion’s Tae Kim wrote in July. That appears now to be the case: the chipmakers Broadcom Inc. and Texas Instruments Inc. are struggling to deliver enough components to Apple, Wu reported on Tuesday.

That Apple had seemingly managed to secure all the supply it needed was all the more miraculous given the semiconductor shortages plaguing other industries – carmakers could lose as much as $210 billion revenue this year as they build 7.7 million fewer vehicles than expected, the consulting firm  AlixPartners estimated last month.

It illustrates the vise-like grip that Apple has on its suppliers. The ability to secure exclusive supply of tens of millions of cutting-edge components is a pillar of Apple’s success under Chief Executive Officer Tim Cook, who built the labyrinthine supply network in his previous role as chief operating officer. The approach not only helps keep it ahead of the competition, it also keeps research and development costs low. Where chipmakers like Qualcomm Inc. spend as much as 25% of their revenue on R&D as they compete to get their components into devices like the iPhone, Apple spends just 6.1% of its own income on R&D.

The greater concern for Apple any risk to demand. While the supply issues might cause longer wait times for those seeking an iPhone 13, the odds are that anyone who wants one will ultimately be able to get one. Indeed, whispers of supply constraints may well prompt consumers to order their devices earlier. And Apple’s users find it hard to switch to devices running Google’s rival Android operating system because of all the photos, apps, and music they have on their iPhones.

But the abatement of U.S. stimulus benefits and the slowing of the Chinese economy may be more significant because they affect consumers’ ability to buy an iPhone at all. That’s far more likely to keep Cook awake at night.

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