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Summary:

Apple has reportedly prepaid for around 60 percent of the world’s touch panel capacity, leaving other manufacturers scrambling amongst themselves for the remaining 40 percent. Apple is expected to cause component shortages among tablet competitors in a number of areas in 2011.

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Apple has reportedly prepaid for around 60 percent of the world’s touch panel capacity, leaving the rest of its competitors scrambling amongst themselves for the remaining 40 percent. Apple is expected to cause component shortages in a number of areas in 2011. It’s nothing new for Apple, and we’re already seeing signs of the strategy’s success.

DigiTimes reports glass capacitive touch panels, like those found on the iPad, are the components whose supplies will be the most limited as a result of Apple having reserved the majority of capacity from suppliers Wintek and TPK. AppleInsider points out that Apple COO Tim Cook told investors in January that his company had committed $3.9 billion to long-term component contracts, and Morgan Stanley analyst Katy Huberty suggested the investment could allow for the purchase of 60 million iPad displays, or 136 million for the iPhone.

Prepaying for a bulk, long-term contract allows Apple to control pricing, causing scarcity in the market, which raises the prices of remaining component stock. Apple’s pre-bought parts then give it a price advantage when it comes to production costs, and one that could grow as the contract progresses. It’s something Apple’s been known to do in the past, specifically with NAND flash memory in 2005.

Apple is uniquely positioned to do this because no other device manufacturer can assume long-term sales success with the same degree of relative certainty. Analysts are predicting a massive year for the iPad in 2011 (43.7 million from iSuppli) , for instance, since it beat all expectations with 14.8 million sold in 2010. With the exception of Samsung, other major tablet-makers have no previous year figures to base expectations upon, and they wouldn’t be anywhere close to within that range even if they could. Besides sales expectations, Apple can also incur more risk because it has a massive chunk of cash on-hand, and alternate lines of business like the iPhone where it could easily use any excess display capacity that might result from an iPad sales shortfall.

Many have asked me why Apple doesn’t just use its significant cash resources to buy suppliers outright, thus guaranteeing itself the cheapest possible component prices and providing even more control over the supply chain. There are a couple of good reasons Apple won’t do that. For one, it already weathers a decent amount of negative press for the working conditions of its suppliers. It’s already a target for humanitarian organizations, and if it were to take over direct control of component factories, it would have to do much more than it currently does to improve conditions environmental standards, which would be costly and time-consuming.

Buying suppliers would also inevitably lead to serious and sustained antitrust scrutiny from the international community. If Apple can buy a company’s capacity without actually buying the company, it makes much more sense to do so. Finally, it could create a vacuum in the component supply industry, leaving a new third-party player to fill the void. Making components scarce is not the same as making them completely unavailable. In the first case, they become more expensive to those without large, pre-paid contracts, leading to higher-priced competitor products. In the second, unmet demand necessitates the creation of a replacement supplier, over which Apple no longer has any control.

Apple’s iPad looks likely to go another year without true competition, this time thanks to clever and far-sighted component hedging rather than just being the only player in the market. Don’t believe me? Just look around at the many recently-announced tablets. The proof is in the pricing.

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  1. What an atrocious article. You should stick to repeating other’s reported facts. Your own explanaitions are absurdly ridiculous.

    Apple isn’t buying Chinese suppliers because it would be a locked into a deal it can’t change, not because doing so would “force the evil company to do more to stop atrocities in China” or because it might face some notion of international antitrust.

    What arrogant nonsense, and a compete perversion of reality. No other tech company even has a supplier responsibility policy that it enforces as Apple does.

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    1. Yeah, these guys are all page view whores. I bet you Darrell loves the Daily Show and laughs along with the mocking of Glenn Beck, but he doesn’t realize how he and Beck are the same. Darrell’s does his whoring in a more harmless arena, but that doesn’t make it ok.

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    2. Somebody is out of touch with the realities of business and government compliance.

      That may well not be their reason, but it doesn’t change the fact that both those issues would have to be addressed at some point in the near future.

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  2. Your evidence of this with the Xoom’s pricing doesn’t make sense — the $800 Xoom has similar features (actually more features) to the equivalently priced iPad. And Motorola just announced a $600 WIFI only version, which is the same price as the equivalent 32GB iPad but with quite a few more hardware features (two cameras, GPS, more RAM, higher resolution display, dual core CPU etc).

    Of course this is comparing a brand new device with one that is almost a year old, so maybe the iPad 2 will jump ahead of the Xoom. At this point it doesn’t seem to me that the next iPad is likely to do much more than catch up in hardware specs, though.

    (And this also is all ignoring the fact that the Xoom probably represents the higher-end Android tablet spectrum. There are already a lot of companies showing tablets priced lower than the iPad, though of course with lower quality hardware in various ways. So far they have been significantly hampered by the lack of a stock Android build that supports tablets; it will be interesting to see what happens in this lower end of the market when that is soon no longer an issue.)

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  3. So in this planet there are only two companies that make panels? Wintek and TPK that is all?

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  4. [...] second way Apple could benefit from buying up an even larger percentage of constrained stock is by reducing the availability of those same components for its closest [...]

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  5. [...] have only indicated a deepening of the supply relationship between the two companies, thanks to a reported large-scale contract for touchscreens and the apparent addition of Samsung as a supplier for MacBook Air [...]

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