Don't Sweat the iPhone Supply Chain. It's Just Fine

(Bloomberg) -- The fortunes of iPhone suppliers are looking strong.

First-quarter earnings at Hon Hai Precision Industry Co. show that Apple Inc.’s chief product assembler pumped $2 billion more into its supply chain than a year earlier.

Weak iPhone sales can’t be blamed for Hon Hai’s net income slipping 15 percent and missing estimates, because they weren’t weak. Revenue at the Taiwanese company was up 5.5 percent for the March quarter, the fastest growth for that period since 2015, and data that was known a month ago. At Apple, which accounted for 51 percent of Hon Hai sales last year, it climbed 16 percent for the three months.

Instead, Hon Hai’s cost of goods sold (COGS) rose, dragging the firm’s gross margin down by 117 basis points. That’s not great news for Hon Hai, but it’s good for its employees, equipment makers and the dozens of component sellers that benefit from the greater largess. 

Last week, my Bloomberg News colleague Yu-Huay Sun told the story of one such supplier. Taipei-based Yageo Corp. makes capacitors and resistors, not just for Apple but for dozens of companies globally including Sony Corp. and Intel Corp. 

First-quarter sales increased 50 percent while net income quadrupled. Production capacity for Yageo is stretched amid surging demand for parts used in TVs, cars and servers, allowing it to join the throng of suppliers raising prices.

At Hon Hai, an 11 percent rise in operating expenses indicates it’s also boosting outlays in broader areas such as R&D. Basic economics tells you that more spending is good for the wider ecosystem.

So when someone’s fretting over weak demand for a smartphone that was released eight months ago, tell them they’re wasting their time.

©2018 Bloomberg L.P.

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