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Apple Inc. (AAPL) Supply Chain Rumors Point to New Products

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Apple Inc. (NASDAQ:AAPL) CEO Tim Cook has offered some sage advice to analysts: even if a supply chain rumor is accurate, it’s impossible to interpret accurately what it means for the overall business.  This hasn’t stopped analysts from trying, however.  In a survey of Apple Inc. (NASDAQ:AAPL) supply chain rumors going back more than a year, I found that they were a very poor predictor of financial performance for any given Apple Inc. (NASDAQ:AAPL) product or for Apple Inc. (NASDAQ:AAPL) as a whole.  However, I did find that the rumors correlated well with subsequent new product introductions.

Apple Inc. (NASDAQ:AAPL)

Supply chain momentum

It’s not always easy to see the correlation, since the rumors often erupt months in advance of the actual announcement of the new product.  This is because there’s a lot of lag built into the procurement process for any given Apple Inc. (NASDAQ:AAPL) device. The iPhone 5 that a consumer buys today contains some parts that were ordered as much as 6 months before the purchase.  Think of the supply chain as a huge, fast-moving freight train.  Bringing the train to a halt requires applying the brakes long before its expected to stop.

Google Inc (NASDAQ:GOOG) has recently gotten a lesson in supply chain management courtesy of Motorola Mobility.  Google Inc (NASDAQ:GOOG) execs noted at their last earnings conference call in January that it was taking a lot longer than they expected to work through Motorola’s product pipeline, fully 7 months after the acquisition was finalized. In Q4 2012, Google Inc (NASDAQ:GOOG) reported an operating loss for Motorola of $353 million.

Survey results

I searched for “Apple Inc. (NASDAQ:AAPL) supply chain rumors” on the web and pulled results going back as far as 2011. As you might expect, the rumor results occurred in clusters in which the source of the rumor was re-reported many times by other sites.  I found 5 clusters of rumors pertaining to the iPhone and iPad, in 2011 and 2012, all reporting significant drops in component parts orders.

Various explanations for the order decreases were offered in the rumors. In 3 out of the 5 clusters, new product introductions were anticipated, while the other two cases were attributed to weak demand.  In 4 out of the 5, including all the cases where new products were anticipated, the rumor clusters were followed in about 6 months by a new generation iPhone or iPad.

The rumors of cutbacks in the supply chain due to weak demand (2 out of the 5) were either partly or completely wrong.  In November 2011, DigiTimes reported that iPhone 4s component orders were down due to weak Q4 demand.  In fact, iPhone unit sales rose spectacularly by 133% y/y to 24.4 million in the quarter.  In September 2011, JPMorgan Chase reported iPad 2 order cuts due to reduced global demand.  In Q4 2011 iPad sales increased by 99% y/y, although there was a new iPad rolled out in March 2012, so the rumor may have been partially correct.

My conclusion from this limited review of supply chain rumors is that while they aren’t predictive of financial performance, as Tim Cook pointed out, they are predictive of future Apple products or product changes.

And now, the new batch

The distinguishing characteristic of the supply chain rumors that have appeared since the beginning of the year is their generally pessimistic tone.  Although in most cases reports have acknowledged that order cutbacks could be due to a new product introduction, the reports have tended to push reduced demand as the most likely explanation.  This shift in interpretation was undoubtedly due to the perception that Apple was losing market share and sales momentum in smartphones and tablets to devices using Google Inc (NASDAQ:GOOG)’s Android operating system, and this was borne out by market share survey results by Gartner Research and IDC shown in the charts below.

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