By Jeran Wittenstein and Mark Gurman
In a world where iPhone demand is on the wane, Apple has a plan B. As customers wait longer between upgrades and the smartphone market saturates, Apple can fall back on charging higher prices for each handset and raking in more money from services such as streaming music, digital videos, and data storage.
However, there’s no back-up for many of the companies that supply components for the iPhone.
The latest evidence that what is bad for Apple can be terrible for suppliers came on two continents within hours of each other.
Japan Display, which gets more than half its revenue from the iPhone maker, cut forecasts. Then Lumentum Holdings, a top maker of iPhone facial-recognition sensors, lowered its second-quarter outlook. Yesterday, Hon Hai Precision Industry Co, the biggest assembler, missed estimates.
“Suppliers are more dependent on volume than Apple,” said Woo Jin Ho, an analyst at Bloomberg Intelligence. “This raises an incremental risk for the rest of the supply chain,” the analyst said.
On Monday, Apple shares fell 5% but Lumentum slumped more than 30% and rival II-VI dropped 13%. Japan Display dropped 9.5%, while Hon Hai Precision Industry Co slipped to the lowest level in five years.
In Europe, Dialog Semiconductor, which gets most of its sales from Apple, fell yesterday as much as 3.6% in Frankfurt trading.
Faced with a maturing smartphone market, Apple’s strategy has been to entice customers to pay more for phones with new features such as facial recognition and more vibrant screens.
The 3-D sensing components from companies like Lumentum are found in iPhones that often cost more than €887. Fewer people can afford to pay that much for a new device.
However, when a sale does happen, suppliers get a one-time payment for their component, while Apple can generate hundreds of extra euro per gadget. In its most recent quarter, Apple reported almost no rise in the number of iPhones sold, but revenue from that business jumped 29% from a year earlier.
If demand for newer, pricier iPhones wanes, Apple can cut component orders, or delay shipments, leaving suppliers with more inventory. That makes them more likely to cut prices when Apple comes back to the negotiating table.
Lumentum’s weaker sales forecast was the result of a shipment reduction from its largest customer just a few days ago, chief executive Alan Lowe said at a conference in San Francisco earlier this week.