Apple’s Potential Manufacturer Shake Up

Apple Inc. (NASDAQ:AAPL) reportedly told supplier Foxconn to ease off the iPhone 5C gas pedal last week. And it seems Taiwanese multinational electronics contract manufacturing company is following the Cupertino, CA company’s orders to shift production to the iPhone 5S.

In another bout of bad news for the iPhone 5C’s desires to see its family grow and prosper, another Apple Inc. (NASDAQ:AAPL) supplier, Pegatron Technology has slashed production in half, according to multiple outlets.

Because of its primacy, the Foxconn news grabbed headlines first. However, an iPhone 5C cut in production by Pegatron is more significant as the company accounts for 70 percent of the slated 2014 Apple iPhone production.

Apple Inc. (NASDAQ:AAPL)

As Apple Inc. (NASDAQ:AAPL) is notoriously reticent to tip its hand, its no surprise that the suppliers (both Pegatron and Foxconn) have been unwilling to add credence to the rumors. In fact, Foxconn has flatly denied the rumors, which originally appeared in the Taiwanese publication DigiTimes.

As an article in Apple Insider states reflecting the general analyst sentiment that surrounded the launch of the iPhone 5C:

The iPhone 5c has generally the same parts as last year’s iPhone 5, but comes in a new plastic casing available in an array of colors.

It’s differentiated from the company’s new flagship aluminum iPhone 5s, which exclusively sports the Touch ID fingerprint sensor for secure access. Some market watchers have predicted that Apple’s iPhone 5c will find greater success in the long-term, as early adopters are more likely to opt for the high-end device featuring Touch ID and the 64-bit A7 processor.

It seems, however, that the above wisdom has not held true.

It’s unclear whether the rumored cutback/shift in production is linked to another report from Apple Inc. (NASDAQ:AAPL)’s Taiwanese OEMs. Sources indicate that CEO Tim Cook’s company is pursuing a fundamental shift in its Original Equipment Manufacturer model. Formerly, OEMs were responsible for both procurement and production of components. Now it seems word has come from California that Apple’s makers will only be concerning themselves with production.

Obviously, such a strategy both disrupts the existing Taiwanese OEM ecosystem and takes a bite out of manufacturer’s profits.

It’s rather surprising that Apple Inc. (NASDAQ:AAPL), a company so fixated on its own profit margins, didn’t pursue this solution sooner to ensure that there weren’t any supply chain inefficiencies. It’s puzzling that the company would be willing to leave such a significant, and potentially costly, element of the manufacturing process in the hands of a contracted company.

Further, such an approach would have all “upstream suppliers” under Mr. Cook’s thumb, which would bring a multitude of advantages.

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