Apple squeezes iPhone parts suppliers to protect margins

Apple has told suppliers to accept price cuts on parts for the next-generation iPhone, and lowered order volumes.

Negotiations over cuts in component prices started in January, suppliers said.

As Apple Inc grapples with falling iPhone sales this year, it is pushing to cut better deals for parts with its suppliers, while carriers in the crucial China market have mobilised to push iPhone sales with deep discounts.

In recent months, Apple suppliers say the Cupertino, California-based, company has told them to accept price cuts for parts destined for the next-generation iPhone while cutting forecasts for order volume. This is likely to hurt some suppliers’ earnings in the second half of the year.

Meanwhile, in the past two weeks, China Telecom Corp has started selling unlocked 16-gigabyte iPhone 6s models for 4,288 yuan ($US642), based on checks at its retail outlets. That is below a price of 5,288 yuan listed on Apple’s China website.

Rival carriers China Mobile and China Unicom Corp have also offered fresh iPhone discounts, although they aren’t as steep as China Telecom’s. In the US, major telecommunications operators sell the unlocked 16-gigabyte iPhone 6s for $US649.

While carriers typically discount iPhones before new-model launches, it is rare for iPhones to be cheaper in China than in the US, as a combination of import duties on components and value-added taxes boosts prices.

Apple declined to comment on its dealings with suppliers and lower iPhone prices. China Telecom, China Mobile and China Unicom didn’t immediately reply to requests for comment.

These moves highlight the difficulties Apple faces to shore up demand for its products as global demand slows and upstart Chinese companies become serious rivals.

Apple also faces financial pressure after the European Union’s antitrust regulator on Tuesday demanded that Ireland recoup about €13 billion ($US14.5 billion) in unpaid taxes from the company, the highest amount it has ever demanded.

In the fiscal third quarter, Apple saw its profit slump 27 per cent from a year earlier on weaker sales, especially in China. Rival Samsung Electronics reported its most profitable quarter in two years in the second quarter as it got a head start on shipping its latest Galaxy S7 smartphones. Apple plans to unveil its next-generation iPhone next week.

Suppliers say this year, Apple pushed to cut both component prices and order volume. The company told suppliers that despite the volume cuts, orders would rise significantly after new-device launches. But given that iPhone sales have been falling this year, suppliers say they are wary about betting on a smash hit. The demands for discounts have irked some suppliers, many of whom get a large proportion of their sales from iPhone parts.

“The reason why everybody is extremely unhappy about it recently is because they played a ‘double cut,’ cutting both the price and the volume of orders,” said a person at one of Apple’s suppliers.

Analysts say the discounted parts will likely help shore up Apple’s earnings in the second half, but dampen profit outlooks for suppliers including iPhone assembler Foxconn Technology Group, metal casing manufacturer Catcher Technology and chip-processing company Advanced Semiconductor Engineering. While a few hard-to-replace Apple suppliers have strong bargaining positions—such as chip maker Taiwan Semiconductor Manufacturing and camera lens module maker Largan Precision—Apple has multiple sources for other components, giving it leverage to seek better prices.

Spokespeople at Foxconn, Catcher, ASE, Largan and TSMC declined to comment on component prices.

Negotiations over cuts in component prices started in January, suppliers said, and have already begun to affect earnings figures for Apple and parts makers. The price cuts helped Apple beat analysts’ estimates in its latest quarter, analysts said, with gross margins coming in at 38 per cent, in line with its estimate of 37.5 per cent to 38 per cent. Apple has forecast gross margins of 37.5 per cent to 38 per cent for the current quarter that ends in September.

Some component makers say Apple told them it could cultivate cheaper Chinese suppliers if they didn’t accept the price cuts.

Apple generally cultivates several secondary suppliers for each component, except for a few key parts—like the processor—for which it is hard to find alternatives given the complexity in manufacturing.

“With global smartphone growth slowing, Apple needs to find a way to maintain its high gross margins,” Fubon Financial analyst Arthur Liao wrote in a note in July. “In our discussions with…the supply chain for the iPhone 7, all components except [the camera lens] face price pressure.”

Some suppliers are already bracing for a sales decline. Pegatron, Apple’s secondary iPhone assembler, said revenue from “non-computing products” would decline 10.5 per cent to 14 per cent in the third quarter from a year earlier. Its revenue in this category consists mostly of iPhones, according to analysts.

Foxconn, formally known as Hon Hai Precision Industry, said its operating margin slid to 2.3 per cent from 3.4 per cent in the second quarter from a year earlier. The company, which assembles iPhones and makes parts, missed analyst estimates for the quarter, reporting a 31 per cent decline in net profit to 17.7 billion New Taiwan dollars ($US566 million).

- Wall Street Journal