By Eva Dou
BEIJING--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
mobilized to push iPhone sales with deep discounts.
In recent months, Apple suppliers say the Cupertino, Calif.,
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 ($642), 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 Ltd. and China Unicom Corp. have also offered fresh
iPhone discounts, although they aren't as steep as China Telecom's.
In the U.S., major telecommunications operators sell the unlocked
16-gigabyte iPhone 6s for $649.
While carriers typically discount iPhones before new-model
launches, it is rare for iPhones to be cheaper in China than in the
U.S., 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
EUR13 billion ($14.5 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% from
a year earlier on weaker sales, especially in China. Rival Samsung
Electronics Co. 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 Co. and
chip-processing company Advanced Semiconductor Engineering Inc.
While a few hard-to-replace Apple suppliers have strong bargaining
positions--such as chip maker Taiwan Semiconductor Manufacturing
Co. and camera lens module maker Largan Precision Co.--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%, in line with its estimate of 37.5%
to 38%. Apple has forecast gross margins of 37.5% to 38% 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
Corp., Apple's secondary iPhone assembler, said revenue from
"non-computing products" would decline 10.5% to 14% 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 Ltd., said
its operating margin slid to 2.3% from 3.4% 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%
decline in net profit to 17.7 billion New Taiwan dollars (US$566
million).
Takashi Mochizuki in Tokyo and Yang Jie in Beijing contributed
to this article.
Write to Eva Dou at eva.dou@wsj.com
(END) Dow Jones Newswires
September 01, 2016 03:12 ET (07:12 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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