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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