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Falling Into the Supply Chain Trap Revisited

So there was a published report this week, from no less than the Wall Street Journal, claiming that Apple had severely cut back on orders for the mid-priced iPhone 5c. As you might expect, a raft of stories were posted claiming that demand for the “cheap” iPhone had plummeted, for why else would Apple order fewer units? Besides, didn’t some large retailers have sales cutting the upfront price in half?

Doesn’t that prove that the public wasn’t taking to the iPhone 5c despite all those TV ads?

You can parse these reports in many ways, and there’s no simple answer. Yes, it’s possible Apple did reduce orders, but that doesn’t mean that production rates for such a product must be consistent in the fashion of a wristwatch. Supply and demand may shift from time to time, and quantities ordered will vary from vendor to vendor. There may be a rush to get initial product into the channel, after which the production lines can cool down. Tim Cook said on more than one occasion that you can’t use a single supply chain metric to measure actual customer demand. That pronouncement came on the heels of claims that demand for the original iPhone 5 had collapsed, which was decidedly untrue.

Of course, the people who talk Apple’s stock down with their fake or misleading statements never seem to suffer the consequences, even if someone’s investments in the company are worth much less as a result.

After the iPhone 5c and 5s were introduced in September, some ill-informed members of the media struggled to picture the launch as a failure. It didn’t matter that Apple moved nine million of them over the first weekend. Apple must have cooked the books, or stuffed the channel. What the critics ignored was the fact that the 5s, the more expensive model, remained in short supply, and you may still wait two or three weeks to get the one you want unless you luck into the exact configuration at a local dealer.

More to the point, the second-tier product, which last year was the iPhone 4s, will always sell fewer copies than the flagship model. It appears, based on some estimates, that the iPhone 5c is doing somewhat better with people who don’t need the latest and greatest. The percentages are all over the place, so it’s hard to know the real numbers. Changes in the supply chain won’t help to provide any meaningful answers. It all comes down to the fact that you can get an iPhone 5c of your choice for immediate delivery, so what’s wrong with that?

Indeed, nobody outside of Apple knows precisely how many units Apple planned to sell, or whether demand matches, exceeds, or has fallen short of estimates. When the iPhone sales for the September quarter are revealed by Apple later this month, you will get the total numbers, but it’s not at all likely there will be a per-model breakdown. There wasn’t one for those initial nine million, and there probably won’t be one when the full quarter’s sales are disclosed, unless Apple can produce a statistic that is way better than originally estimated.

Had there been no iPhone 5c, Apple would have simply sold last year’s iPhone 5 as the midrange product. If the iPhone 5c sells in larger numbers than would be expected of last year’s model, Apple is ahead. If the iPhone 5c sells the same, Apple is still ahead because it costs less to produce. There’s no elaborate metallic assembly process involved, just polycarbonate with a metal shell. The price difference may not be a lot on a single unit basis, but when several million are built, it adds up quickly.

Indeed, on any normal basis of comparison, Apple’s strategy is brilliant. Two new models can be advertised rather than just one. For many, the iPhone 5c is really all they need. Having spent a week with one, before I got an iPhone 5s to test, I can tell you that the actual performance differences aren’t necessarily that noticeable for many functions and many of the apps that people might use. Touch ID is a neat and reliable security feature, and the iPhone 5s also takes somewhat better pictures than the 5c. But if you pay for your mobile handsets up front rather than on a subsidized basis with a carrier contract, even a savings of $100 may be significant.

Sure, I suppose Apple could have cut yet another $100 off the price, hurting profits severely, with no guarantee that higher sales would make up the difference. That usually doesn’t happen, and only Apple and Samsung are making any real profits from selling mobile gear.

Now I did notice one significant change from past reports of potential problems with demand for a new Apple gadget, and that is that the stock market barely noticed. The stock price has been on mostly a growth curve for a while. If investors are impressed with Apple’s expected iPad announcements during the October 22 media event, the trend might continue.

What’s more, the WSJ appeared to backtrack from the original story in an updated version.

But, if iPhone 5c sales are better than the industry expects, maybe Apple will confound some of those analysts by telling us so during the forthcoming quarterly conference call. That would be a change. That’s what some of those critics deserve, at least when they’re actually paying attention to facts.