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The iPad slowdown and impact from the Japanese disaster

Tim Cook explains that there was no material impact from the Japanese disaster:

“Regarding our global supply chain, as a result of outstanding teamwork and unprecedented resilience of our partners, we did not have any supply or cost impact in our fiscal Q2 as a result of the tragedy, and we currently do not anticipate any material supply or cost impact in our fiscal Q3. To provide a bit more color on this, we sourced hundreds, literally hundreds of items from Japan, and they range from components such as LCDs, optical drives, NAND Flash and DRAM to base materials such as resins, coatings and foil that are part of the production process at several layers back in the supply chain. The earthquake and subsequent tsunami and the associated nuclear crisis caused disruption for many of these suppliers, and many unaffected suppliers have been impacted by power interruptions.

But since the disaster, Apple employees have literally been working around the clock with our supplier partners in Japan, and have been able to implement a number of contingency plans. Our preference from the beginning of this tragedy has been to remain with our long-term partners in Japan. And I have to say, they have displayed an incredible resilience that I personally never seen before in the aftermath of this disaster. So while we do not anticipate — currently anticipate any material impact to our component supply or cost in our fiscal Q3, we do need to caution everyone that the situation remains unpredictable”

via Apple Management Discusses Q2 2011 Results – Earnings Call Transcript – Seeking Alpha.

Still, the message did not get through to everyone:

However, the supply chain impact on Apple from Japan’s earthquake, tsunami and nuclear power crisis is the culprit behind the only product line that came in below expectations – iPad. Apple sold 4.7 million units of iPad, vs. analysts’ expectation of 6 million.

The Rise and Rise of Apple: Time For A Split? – Seeking Alpha

The shortfall in iPad units was explained by Tim Cook as ramp-up challenges:

“Let me mention a few things for you to consider, Toni. First off, product transitions are never simple. And as you can probably appreciate, we are in a position that we have to call them for many, many weeks in advance in terms of how many of the current product we want to produce and the dates at which we will announce the new product. We drew the channel down on the current product or the original iPad, I should say, by 570,000 units during the quarter. And we added at the end of the quarter 170,000 of the new iPad 2s although most of that was in transit at the end of the quarter. And so the net reduction was 400,000. And so our sell-through was above 5 million for the quarter. And again, this has to be planned quite a ways in the future. I think the key point here is —

[also the dates, just to remind you, we set out an invitation to the event toward the end of February. We had the event in early March. We placed the unit on sale in the United States on March 11 and our quarter ended about 2 weeks thereafter. And so there was some expectation of a new product, and we would have obviously factored that into our thinking about the product transition as we plan the number of the original unit to build.]

And so I think the key point here is that I’m extremely pleased with the progress that we were making on the manufacturing ramp. We have gotten off to a materially better start and produced a lot more units than we did on the original ramp of the first iPad. And when we’re so confident with our ability to supply that we’ve already put on 25 additional countries at the end of March, and we’ll be placing on 13 more next week and we’ll do even more as we stepped through the quarter.”

  • http://twitter.com/ankleskater @ankleskater

    "However, the supply chain impact on Apple from Japan’s earthquake, tsunami and nuclear power crisis is the culprit behind the only product line that came in below expectations"

    It is baffling that analysts (or any rational thinker) fail to look at chronology. March 11 – first day of sale of iPad2 and also day of disasters for Japan. Any iPad2s shipped in the remainder of March were built well before March 11. How could the disasters have impacted iPad sales in the last quarter? Even if analysts/writers/bloggers refuse to believe Tim Cook, the logic is very simple!

    One question – what did Cook mean when he said "we drew the channel down by 570k units of the original product"? What does drawing down the channel mean?

    Thx

    • asymco

      They had built more of the first version that was sold and that was sitting in "channel inventory". These were units that were on the shelf or warehouses early in the quarter.

      Drawing down means reducing or eliminating that inventory.

  • CndnRschr

    In Toronto, there are no iPad2's available for immediate purchase. All AppleStores in Canada advise customers to go online and reserve one after 9 pm for pick-up the next day*. This inventory is often insufficient. Best Buy and FutureShop have semi-random deliveries direct from Apple (not the usual go-between or Best Buy warehouse). They did get a few more last week on the launch day of the RIM PlayBook. The Xoom is also out of stock at Best Buy but there are large quantities of Samsung Galaxy Tabs and RIM Playbooks. The demonstration iPad2s at Best Buy have severely frayed power chords. Demand is extremely high.

    * Reservation URL for pick-up at a Canadian AppleStore is: http://reserve.apple.com/WebObjects/ProductReserv

    There are zero of any of the 12 different iPad2 models available right now. This system presumably reduces scalping. The average price for iPad2s on eBay are $100-200 over list. Some PlayBooks on eBay are at or below list.

    • Hamranhansenhansen

      It is the same everywhere. Demand is much higher than for original iPad, yet they are in a ramp up where they can't make as many right now as they will be able to in a few months.

    • unhinged

      Those frayed power chords must be the result of the Garage Band app… :)

  • Andrew

    Supply issues or not, this does not explain why we are not allowed to buy an iPad2 in Japan. It's almost like Apple is punishing us for the earthquake.

    The iPad went on sale on 11/03/11 and was due to be available in Japan on March 25th, a month ago. After the earthquake they said it would not be sold in Japan but would be sold elsewhere. OK, the Apple Store in Sendai may have been affected, but otherwise there is no reason to delay this product introduction. I think Apple has simply used this as an excuse, because they cannot keep up with worldwide demand, to allow more iPad2 units to go elsewhere.

    Sure, Apple made the right gestures with the iTunes Japan album, which will stuff more yen into the coffers of organisations like Japan Red Cross that don't know how to spend it, but the iPad2 delay looks more like a cynical exploitation by Apple of the earthquake and tsunami to deprive the Japanese market of products while it sells them elsewhere.

    To be clear, outside the Tohoku area, there is no transportation, logistical, technical, production or humanitarian reason for Apple not to sell the iPad2 in Japan.

    Curiously, Apple is now advertising the iPad2 on its Japanese website, but unlike earlier advance notices of Apple products it does not offer a date when they will be available. Steve Jobs told me last year "I love Japan", but this year maybe that should read "I love Japan because I can blame Japan for the fact we didn't build enough iPad2's and we can make our Japanese customers suffer for it"

    • Andrew

      We should also acknowledge the generous offers made by Apple and/or SoftBank to mobile phone users who suffered losses from the earthquake and tsunami, although I have not seen any report from either company on anything that made a difference.

    • http://twitter.com/tommy4490 @tommy4490

      Anyone ever read such bitterness directed at any other company?
      Samsung's is punishing us! Motorola is using us!

      Elevated expectations bring the highest frustrations.

    • addicted

      @Andrew
      1) There are many reasons why it makes no sense to sell in Japan. Supply chains might be greatly affected. There is large amount of uncertainty (e.g., my company was willing to relocate any of its 100s of employees outside Japan, at company cost, if they wanted to do so). Finally, it would just be crass to release a new product, accompanied by the usual Apple fanfare, right after an emergency of this nature. Is it so hard to imagine the news headlines, bemoaning the falling of human civilization because a few people stood in line outside an apple store after the earthquake?

      2) The American Red Cross is one of (if not THE) the top rated charities in the world. There is no reason to believe that the Japan Red Cross is not in the same vein.

      3) Ironic that you are saying Apple is using Japan as an excuse, in an article where Horace quotes Tim Cook talking at length about why Japan was not the reason they could not manufacture enough iPads. What happened to logic, and reading comprehension?

    • Hamranhansenhansen

      > To be clear, outside the Tohoku area, there is no transportation, logistical, technical,
      > production or humanitarian reason for Apple not to sell the iPad2 in Japan.

      Only Apple can know that. They are the ones who actually have to put on the show.

    • KenC

      I think the initial launch delay was so that Apple would not appear insensitive to the tragedy going on in Japan. Rampant consumerism, as exhibited by lines of buyers, with smiling high-fiving store employees, just does not juxtapose well against the overwhelming devastation in the northeast.

      I would guess that an understated iPad2 launch will be coming shortly.

      • Andrew

        I can understand the "sensitivity" argument, except that I am currently receiving a barrage of emails from Apple Japan:

        iPod touch。母の日のプレゼントにぴったりです。
        iPod touch. The right present on Mothers day.
        iPhotoで作ったオリジナルギフトでお母さんを驚かせよう。
        Create an original gift to surprise your mother with iPhoto.
        みんなで楽しもう。ゴールデンウィークはApple Storeへ。
        Everybody, let's have fun. Go to the Apple Store during Golden Week.

        I cannot help feeling that someone inside Apple is breathing a sigh of relief that , with their problems building enough iPad2's to meet demand in the US, and their commitment to start selling iPad2's elsewhere, they don't have to introduce them to Apple's second-largest market right now. And I find it even stranger that Apple is now advertising the iPad2 in Japanese, without stating when it will be available.

      • Andrew

        In fact, Apple continues to sell the original, obsolete iPad in Japan. This was discounted by $100 when the iPad2 went on sale in the US. So Apple is actually overcharging gullible Japanese customers with an out of date product.

  • justinfadams

    Horace. This Seeking Alpha article is poorly written. Every time Apple reports earnings, these same analysts come out of the woodwork, and inevitably repeat the same 3 things.

    1) Criticism of cash position and explanation of what to do / buy with the cash (buy Facebook!).

    2) Misplaced anxiety of the "valuation" of the company being too high (without admitting P/E being below Apple's peers in tech):
    "From a valuation standpoint, Apple's current stock price implies that investors have high or maybe even unrealistic expectations of Apple. "

    3) Pre-criticism that the company will stumble with the next product or iteration of existing products, and anxiety about how all its competitors are finally catching up (even though they lack the focus and culture of Apple).

    I'm not naive about the fact that there are only a few more places in the home that the company can innovate around (the TV), but I get tired of reading the same shoddy analysis 4 times a year.

    Thoughts?

    • Andrew

      The only parts of this article that I can see that were actually written by Horace were:

      "Tim Cook explains that there was no material impact from the Japanese disaster:"

      "via Apple Management Discusses Q2 2011 Results – Earnings Call Transcript – Seeking Alpha.

      "Still, the message did not get through to everyone:"

      "The shortfall in iPad units was explained by Tim Cook as ramp-up challenges:"

      Everything else was written by the people quoted, not by Horace. So, "poorly written" may be a valid criticism of the people quoted, but not of the original Asymco article.

      Finally, any comment that ends with the line "Thoughts?" must be regarded as marshmallow-headed linkbait. If you think otherwise, send me your "Thoughts"

      • FalKirk

        "… any comment that ends with the line "Thoughts?" must be regarded as marshmallow-headed linkbait."

        Dismayed to hear that you feel that way. I often end my posts with the word "Thoughts?" because, well, I want to learn from other people's thoughts. Sorry you find that offensive.

      • unhinged

        And the commenter clearly outlined his disappointment lies with the SEEKING ALPHA article and the "analysts" of such calibre.

    • Hamranhansenhansen

      There are many, many opportunities for Apple. Computers are going into everything. In 2006, if you told me my clock radio would be running OS X in 2007 I would have said you were crazy. Now, I literally can't remember what woke me up before my iPhone. Everything in the home or office that runs on electricity is a potential place for an Apple product. Not just the items that already have computers in them, like the TV or the car. In some cases these will be new devices, but in many cases just a new app and accessory that creates new demand for huge numbers of iPads or other iOS device.

      Things like bank machines and restaurant terminals are a huge opportunity. They are currently running 10 year old XP, which we know because we see Blue Screen Of Death regularly. Banks spend incredible amounts of money customizing the interfaces and even more managing their diverse collection of interfaces because they have different vintages of machines, and some are their own and some from banks they merged with. Updating their interface software is ridiculously expensive because some machines have one array of buttons and some have others, some have touch and some do not. Imagine a bank machine where there is an iPad between user and the rest of the hardware, it would pay for itself really easily, and iOS is much more stable, secure, and easy to manage and deploy custom apps on than Windows. It could even have a near field component, or record a video of the user as anti-fraud measures. If it sounds strange to think of Apple doing these kinds of non-consumer items, notice that they just started selling their Point Of Sale system to other retailers. They're replacing devices that run Windows NT and CE.

      There is a new van from VW that has an iPad dock in the console. A lot of cars already have iPod dock connectors. The car is a huge opportunity.

      When you have one computer in your life, you can get a bunch of training and work around its poor interface, but when you have 50, you need them to be easy and intuitive. Apple is the only company that provides that. They are going to be the interface to a lot of computing going forward.

  • justinfadams

    Andrew:

    I meant to criticize the Seeking Alpha article, not Horace's post.

  • addicted

    Horace, I would be interested in you doing a post about the effect releasing a cheaper, without contract, iPhone, would have on Apple's business.

    This has been rumored quite a bit. However, it would obviously hurt the tremendous margins the iPhone sees currently. I wonder whether the market share increase would outweigh the loss of margins.

    • russell

      Addicted,
      Good question, as I have been trying to rule out the cheaper phone possibility based on the sustained supply/demand inversion that Apple seems comfortable being in for now with their hi- margin product lines. Apple behaves as if innovation takes priority over most everything (market share) and big margins/cash accumulations are just a side effect in all this. I don't mean this in a negative way, its just the way they play.

      I

      • addicted

        Russell, what you are saying is largely right. The reason my interest was piqued in this issue was because I recently read an older (a few months/years?) interview with Steve Jobs, where he stated that the big failing with the original mac was that they went for profits when they should have aimed for market share. Seeing the aggressive pricing of the iPad, I think they still believe that.

        @asymco – Apologies for the off topic comment.

      • Hamranhansenhansen

        Their products are not high-end, they are best-in-class. iPod classic is not the high-end of the music player market, that is iPod touch. But iPod classic is the best-in-class hard disk -based or high capacity music player. iPad is cheaper than competing tablets. XOOM is really the high-end tablet. But iPad is best-in-class. In PC's, the have the best system in every class, including iPad, which I would argue is their netbook or entry level notebook, the "$500 Mac" that everybody said would sell so well if Apple ever made it.

        So a full range of phones is coming. I think the September combined iPod/iPhone event will combine the iPod and iPhone into one Apple mobiles lineup, with Wi-Fi in all and optional 3G in all, and iPod really becomes solely an app, and they can all sync to iTunes on Mac or PC or cloud.

    • asymco

      The effect will be a growth rate in the >100% range for several years. The iPhone margin is an illusion. What you're seeing is a commission from operators to Apple for migrating users to higher ARPU data plans.

      The switch to a low price product would be a re-definition of what the operators hire the iPhone to do.

      • http://opineapple.com/ Mark Newton

        As Horace says, the premium paid for iPhones is a commission from carriers in return for Apple delivering them long-term contract customers. By extension, cheaper iPhone models should ONLY target markets where such long-term value doesn't flow to carriers – ie: pre-paid markets.

        But how does Apple address pre-paid markets without cannibalising the contract market? The current approach is to maintain previous models (currently the 3GS) on lower ASPs, but that does not cut costs sufficiently to take the broader market.

        Developers will expect Apple to support Apps on any cheaper iPhone model, which leaves only the following options for reducing cost while maintaining a motivation for premium customers to yearn the dearer models:
        o Minimal storage.
        o Lower resolution displays.
        o No GPS, accelerometer, gyroscope or digital compass (will still offend some developers).
        o No streaming from iTunes+.
        o No cameras.
        o No iPod functionality.
        o No AirPlay.
        o Etc…

        All of these compromise the device to some extent, but all are doable in the manner of the iPod range.

      • Addicted44

        If apple were to add cellular circuitry to the iPod touch, such a phone could easily sell for about 250-300 and maintain iPod touch like margins. Of course, this would cannibalize the commissions earned on the iPhone as is, so it's not obvious apple will do this.

        However, the high price of the iPhone in markets where contracts are not popular has certainly hurt sales.

        Of coursed this question is academic as of now, because iPhone sales are largely supply constrained, but it might be an issue when apple is looking for it's next phase of growth in a year or two.

      • AdamC

        You are quite presumptuous of what Apple can do so sit back relax and see what they can come up with to blow us away.

      • http://opineapple.com/ Mark Newton

        Don't confuse presumption with discussion. The sentence "But how does Apple address pre-paid markets without cannibalising the contract market?" was a rhetorical question, intended to prompt thought and comment.

        Thru discussion, people learn from one another. Thru thinly veiled suggestions that we all just shut up and wait for Apple's next move, we learn squat.

      • Iosweeky

        iPhone Air (slimmer, slower, 3G only):  $399 (8GB) – free on contract & $499 (16GB) – $99 on contract

        iPhone 5 (faster, 4G/LTE, HD camera):  $599 (32GB) – $199 on contract & $699 (64GB) – $299 on contract

    • Hamranhansenhansen

      Apple already makes a cheap iPhone which they call "iPod touch" and they sell 1 for every 2 iPhones and that hasn't prevented them from having great margins.

      If they put 3G in an iPod nano and sell 250 million per year free-with-contract to feature phone users, I don't think that hurts iPhone at all. It likely hurts Nokia and Android much more. Apple could easily include a set of built-in apps that outclasses the best of Symbian and Android.

      But anyway, Apple doesn't play defense. They won't protect iPhone. And they will certainly make more than 1 phone model. So a full range of phones is coming. Not doing iPod nano to protect iPod classic would have been a terrible mistake.

      • unhinged

        Perhaps the 3G circuitry in a separate enclosure that plugs into the cable connector and allows passthrough for that? In other words, something like a plug-in battery pack, and the device would attach to any of the iPod range.

        I don't see such a thing coming from Apple, but it would be a cool accessory – especially with a very large antenna for 3G access in areas with poor coverage.

      • davel

        I agree.

        A family of phones a la the iPod line is coming. The question is when.

        At some point Apple will do away with the carriers too. They tried last year and they revolted at the idea of a universal sim.

  • Jon

    Does anyone see how Apple can meet demand? If this post pc era comes about as expected, how can one company possibly supply an outsized market share? I can’t see how they can unless they deploy their massive cash in a substantial manner.

    • Hamranhansenhansen

      Same way Microsoft met 90% of PC demand for so many years: they just need more manufacturing partners. They need to have iPads being made in 10 factories, or 20 factories. It's not like HP is going to make their own TouchPads, so what we are really talking about is what percentage of worldwide tablet-making capacity will be making Apple and what percentage will be making other. Right now, it is 90%, and for music players, 75%. No need for either of those to change.

      iPad 2 is in short supply right now because it is really the first mass-production iPad, the first one the whole of Apple created, made to be produced in huge quantity, and they killed the previous model. Going forward, they will ramp up iPad 2 and likely sell it for 2 years, and next year just add iPad 3, and each year retire one and add one, but still have a model that sells right through the transition. So this is likely the darkness before the dawn when it comes to supply.

      • Jon

        I’m not sure it’s as simple as you make it sound. Microsoft is not a good example. They have a different business model. They license their software. No supply constraints then. Cook needs to execute on this issue or the first mover advantage could be lost. I don’t care how innovative and creative Apple is at creating cool new gadgets. At this point in time it’s all about finding production and getting to it to market on a scale no one has ever done before.

  • Steve

    Horace, Immediately after your first supply chain quote, Tim Cook said the following about Q3:

    "Further, there are some supply risks that are beyond the current quarter. And although we know of no issue today that we view as unsolvable, the situation is still uncertain and there's obviously no guarantees. For this reason, it's difficult to predict whether the issues created by the tragedy would impact revenues beyond Q3."

    This sounds like there is a new product comming out in Q3 that has significant sourcing from Japan, and that it IS at risk. In other words, current products are OK. But that One More Thing in September may have supply chain problems.

    Am I reading this with rose-colored glasses?

    • asymco

      I read it as a standard disclaimer. "And although we know of no issue today that we view as unsolvable"…

  • Tom

    I think it’s becoming obvious now that iPad sales will have a lot of seasonality, just like iPods, and purchases won’t be spread out evenly by the force of 24 month contracts, as with iPhone. Some iPad predictions calling for 40 million sold in 2011 are starting to look baseless now, reminding us of the lazy linear models Horace has found in smartphone predictions. Less than 40 million are not a problem for Apple though. They’ve always planned this as a marathon. It’s a problem for competitors who were planning to sell a couple million me-toos in Apple’s tailwinds. Few market observers appreciate that, unlike the general phone market that was alive and kicking before the iPhone and Android phones, there is no tablet market before, besides or after the iPad. Unlike a phone, people don’t need a tablet (at least for the next few years), so they’ll not be prompted to choose between iPad, Xoom or Playbook, merely between iPad or non-consumption. The “other” tablets will perform terribly this year, with less than 10 million units being shipped and much less actually being sold.

  • Tom

    Addicted: I think the main road block for a cheaper iPhone is the $400 subsidy that Apple enjoys with its two biggest customers, Verizon and AT&T. Why make an iPhone (for the developed world) cheaper if it would only move profit matgins back from Apple to the carriers, without helping customers? Apple needs to find an answer for that.

  • Cadillac88

    To Jon and a few others that re-phrase ‘how many can Apple sell?’ to ‘how many can Apple manufacture?’. Bingo.
    When Apple launched iPhone 4 to huge demand Apple made one iPhone 4 to OHA’s Two. It pretty much sold that way due to the fact Apple couldn’t make three. Not a good problem to have. Apple wouldn’t have done better to delay the iPhone 4 because there was insatiable demand for new smartphones in general in the way of instant gratification. Hearing that iPad 2 is ramping faster than iPad 1 is reassuring. Agreed, Apple needs to spend bigtime and smartly to solve the production problems ASAP.
    It is looking more and more like Apple has learned from the iP4 experience and is introducing filler products to reduce the lost sales of delaying the iP5 to September.
    I think Hoarce’s iPad numbers are accurate as I don’t see Apple being able to more than double the original iPads numbers.

  • timnash

    Apple's 10Q gives some useful info about its component supply, which underpins Tim Cook's comments regarding material supply in Q3.
    Purchase Commitments with Outsourcing Partners and Component Suppliers (page 32)
    'As of March 26, 2011, the Company had outstanding off-balance sheet third-party manufacturing commitments and component purchase commitments of $11.0 billion.' – up from $7.9bn last quarter.
    This is in addition to the long term purchase agreements
    'As of March 26, 2011, the Company had off-balance sheet commitments under long-term
    supply agreements totaling approximately $2.0 billion to make additional inventory component prepayments and to acquire capital equipment in 2011 and beyond.'