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iPhone 7 Margins Menaced as Apple Inc. (AAPL) Loses Leverage With Suppliers

Apple iphone 8

Apple Inc. ’s efforts to get lower component pricing from the iPhone suppliers has, as per a recent report by supply chain monitor DigiTimes, met with strong resistance. In recent weeks, the US firm had been seeking to convince component makers to reduce their quotes for the iPhone parts by 20%, claims the report.

Apple, Inc (AAPL) iPhone 7

Apple losing its leverage

When it comes to obtaining favorable contract terms, the iPhone maker has been able to wield a lot of power in the past, but as the sales of iPhone is on the decline currently, the firm has not been doing well in negotiating favorable contract terms.

Apple Inc. , generally, is able to get some deals from suppliers that are good in nature because it is willing to pay up-front for parts, and the suppliers can make up the difference on volume. However, the order for the iPhone components are declining 30% year over year, and it is probably why some of the suppliers were pretty prompt in balking Apple’s demands.

It cannot be ignored that Largan Precision or chip maker TSMC were not included in Apple’s demand for more favorable pricing as the iPhone maker cannot find adequate replacement for companies that provide high-end camera modules and foundry services, respectively. TSMC is Apple’s exclusive “A10” chip foundry for the upcoming iPhone 7, and Largan Precision has supplied camera modules for the iPhone in the past.

“Major downstream suppliers, notably Advanced Semiconductor Engineering (ASE) and associated companies under the Foxconn Group, have replied Apple that they could not be able to accept orders without reasonable profits at this time,” the report reads.

Using Chinese suppliers as leverage

Apple Inc. is using in the rising handset supply chain in China to compel the Taiwan-based firms to decrease their quotes in comparison to the ones offered by China-based suppliers. However, the quality of the products deployed by China and Taiwan-based suppliers stand at different levels, so it does not make any sense why the tech giant is doing such thing, notes BGR.

It will, however, be interesting to see how the margins of the iPhone 7 are affected with Apple and component suppliers at a seeming standstill. The iPhone 7 is expected to debut next month, i.e. early September. The differences between the iPhone 6 family and iPhone 7 possibly include a base 32GB of device storage, enhanced fast charging capability, and camera improvements. The only big change in the upcoming iPhone model is the exclusion of the analog headphone jack.

On Friday, Apple shares closed up 0.26% at $109.36. Year to date, the stock is up almost 2% while in the last one-year, it is down almost 7%. The stock has a 52-week high of $123.82 and a 52-week low of $89.47.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.