Supply-side reform

Apple's Asia suppliers have bigger challenge ahead

Apple's Asian suppliers have more to worry about than erratic iPhone sales. Worries the $560-billion hardware giant will make fewer of its latest devices have hit component makers' shares. Yet their real test will be adapting to an era where smartphones are no longer the main driver of growth.

Concerns have built since late last year, as suppliers started talking down their own prospects, and analysts then cut sales forecasts for Apple. On January 6 Japan's Nikkei reported Apple would slash production of the latest iPhone 6S and 6S Plus models by 30 per cent this quarter. As of January 6's close, shares in medium-sized Taiwanese suppliers Catcher Technology, Pegatron, and Largan Precision had all more fallen more than 20 per cent in just a month.
 
Some perspective is needed. Erratic sales are to be expected, since iPhones now tend to have a two-year cycle. Apple intersperses brand-new models with less dramatic follow-on versions, which tend to sell less well. And the iPhone 7 should be a big hit.

Still, the supply chain faces a bigger challenge: an over-reliance on one company and one product. Sector giant Hon Hai's size and diversity - it both makes parts and assembles phones - insulates it somewhat. But smaller, more specialised outfits like Catcher, which makes iPhone casings, and Largan, which supplies camera lenses, are more exposed to the risk that Apple switches supplier or demands price cuts. More than 60 per cent of Catcher's revenue come from the Cupertino giant, HSBC analysts reckons.

That has been a great ride - Catcher and Largan shares have respectively roughly tripled and quadrupled since the start of 2013. But smartphone growth is tailing off sharply. The industry grew less than 10 per cent in 2015, compared to 40 per cent in 2013, IDC data show.

At this rate, a shrinking market is not unthinkable. PC sales, after all, have been declining since smartphones took off. And the next big thing is hard to spot. Virtual reality, smart cars and wearable electronics are all promising but are unlikely to match smartphone sales anytime soon. For companies that lack the scale and technology to cater to a wider range of products, the transition may be bumpy.