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Hon Hai's iPhone 5 Problems could be Larger than we Think

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While Reuters reported earlier today that Taiwan's Hon Hai was finding it difficult to cope with the massive demand for Apple's iPhones, another report published today frames the problem in an altogether different light that could pose larger problems for Apple meeting iPhone demand for the holidays.  


Reuters report stated that Foxconn Chairman Terry Gou told reporters today that "It's not easy to make the iPhones. We are falling short of meeting the huge demand." That statement is fully supported by problems that we first reported on in early October concerning quality control and a lack of Hon Hai employee training.


The Wall Street Journal (WSJ) supported this position as well by stating that some quality standards still couldn't be met due to design-related production difficulties. But then the report added a little interesting twist. According to the WSJ, supply-chain problems have led to a long wait for the iPhone 5 since the device's late-September launch, analysts said. The scarcity of the iPhones have been weighing on Apple's share price as well, as investors are concerned Apple may not be able to meet consumer demand in the near future, weighing on its earnings.


The point about the problem flipping from being one related to a design problem to one being supply-chain related caught my eye. While Apple was recently ranked number one for Supply Chain Management for the fifth consecutive year by Gartner, a new Korean report posted today seemed to think that recent moves by Apple against Samsung as a supplier could backfire against them.


A leading, yet unnamed research firm in Korea that was quoted in this report insisted that Apple's new diversification strategy would have minor impact on Samsung while putting Apple's supply chain at risk of deteriorating. Specifically, a fund manager from a European investment bank in Seoul stated the following in the report:


"By excluding Samsung in its parts-sourcing channels, the delivery timing for the new mini iPad sold via Apple's online stores was delayed two weeks, while the delivery of its fourth-generation iPad were also delayed one week as initial volumes of the devices were small.


Supply remains very tight even in its strategic smartphone, the iPhone 5. The exclusion of Samsung in displays and other parts is one crucial reason. Apple doesn't want to see a steep fall in its stock price and that means the company is readying itself to pay more to buy Samsung parts."


The Korean Times article appears to fill in some of the blanks left in the Wall Street Journal's report claiming that the iPhone schedule is under pressure due to a supply-chain problem and not necessarily one relating to design issues.


One problem appears to be real while the other may have been manufactured to mask the real problem. The question is which is the real problem. If it actually turns out to be a supply-chain problem rather than a design problem, then it could materially affect supply for the holiday season and dampen Apple's financials in the New Year.


Why or why do I think that Samsung is behind this current problem with the iPhone 5's delays? Then again, it just might have been Apple shooting themselves in the foot. Time will tell.   



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Given that Apple were one of their biggest customers in component supply, it is very unlikely that Samsung would have deliberately disrupted component supply as you seem to be suggesting. What is known is that Apple have pulled away from them so if, and it is a very big if, it is a component supply issue, then it is Apple who have messed up. The unofficial word is that the build and product yield issues are related to the design of the iphone 5, not components par se, although there are obviously issues with the displays from Sharp, etc.

Now knowing how Foxconn operate, their recent press release could be smoke and mirrors to mask a deeper problem, and you have to ask the question why they would have been releasing this information in the first place as they would no doubt be getting it in the neck from Apple, so things may not be as they seem, but it is the overly used phase, " the overwhelming demand " that seems suspect to me. It is a phrase designed to imply a massive demand, but the fact it is so over used could imply that the demand is not as strong as they are trying to project. Call me cynical if you want, but Apple are the masters of smoke and mirrors and marketing hype, although just like smoke, you can see straight through it, so maybe this is all being used so that they can say at the end of this quarter that sales were not as strong as they were expecting because of product supply issues.

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