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Apple Inc. (AAPL) iPhone Profits Come at a High Price to Suppliers

Apple Inc (AAPL) iPhone 7

Apple Inc. has long been an outlier in a market where firms had to live with very thin margins. The margins that the iPhone maker enjoys on its products – from notebooks to the iPhones – are unbelievably high. But, it appears, in an effort to protect the margins it used to enjoy on the iPhone, the firm is engaged in some behind the scene maneuvering, says a report from Digitimes.

Apple Inc (NSDAQ:AAPL) iPhone SE

Apple demanding price cuts from suppliers

The incredibly high margins are, in fact, the reason why the Cupertino-based firm controls more than a 94% of all profits from the smartphone market globally, despite other producers enjoying much greater sell-through volume. Apple’s strategy in this respect is two-fold, as per the report. On one hand, the iPhone maker looks for new component suppliers to provide them with a better price, and on the other, the firm asks existing component suppliers for price cuts.

“With worldwide smartphone shipment growth slowing down, Apple has been cutting its existing upstream component suppliers’ quotes and seeking new component suppliers to maintain its high gross margins,” says Digitimes. Citing upstream supply chain sources, the report says many Taiwan-based IT players like Foxconn, Pegatron Technology and Largan Precision have already been affected.

Over camera module orders, Largan is currently facing strong competition from Japan-based Kantatsu while Pegatron and Foxconn are seeing the US firm adding new ODM partners such as Wistron for manufacturing its new iPhone.

In addition, Taiwan’s printed circuit board (PCB) players are competing aggressively to get orders from Apple Inc. by slashing prices. Only FPCB players Flexium Interconnect and Zhen Ding Tech are enjoying stable profits so far.

What’s driving Apple?

At this point, it is difficult to say for certain what is exactly driving the Cupertino-based firm. Is the iPhone maker trying to increase margins because it is expecting another lull iPhone sales with the iPhone 7? Or maybe it is possible that the iPhone 7 is more expensive to manufacture, and the tech giant is looking to maintain its historic margin levels.

Well, it is too soon to tell, however, this is just another reason why the upcoming iPhone 7 could be the riskiest and the most interesting iPhone to release later this year.

Suppliers too dependent on Apple

Apple shares are down almost 10% this year. Until the iPhone sales resume growing, the stock is unlikely to return to its earlier highs, say analysts. But is the tech giant the only company depending on iPhone sales?

After Pacific Crest analyst Michael McConnell warned of “much more disappointing” iPhone sales in the second half of 2016, shares of Cirrus Logic, InvenSense and Skyworks Solutions, lost 6% on Tuesday. All three are the leading chip suppliers for the iPhone.

InvenSense makes sensor chips that let the iPhone measure motion whereas wireless radio chips are supplied by Skyworks that let the smartphone connect to mobile networks. Cirrus makes audio chips, and it might benefit from the loss of the headphone jack, if Apple Inc. enhances the sound output with more expensive and newer digital audio features.

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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.

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