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When Apple (NASDAQ: AAPL) recently announced second quarter results for the current fiscal year, it established new records for revenue and profit. However, the tech giant missed sales expectations on the second version of its hugely popular iPad, which it put down to huge consumer demand and supply side constrictions. The company brushed it off as a ‘happy problem' and went on to report unit sales of iPhones, iPods and Mac that beat Wall Street expectations during the quarter.
Coinciding with the earnings report was the Japanese earthquake and tsunami, which compounded concerns about Apple's ability to meet surging demand for its products going forward. The company reassured that it did not anticipate the event to have any material impact on earnings but a supply chain risk was still present. Apple recently took another supply side blow after an explosion at a Foxconn factory prompted it to be shut down. Reports indicate that the factory contained an iPad 2 assembly line.
Foxconn is the largest electronic components manufacturer in the world and the biggest private employer in China. The company assembles iPhones and iPads for Apple and is considering a huge investment in Brazil to setup an assembly plant for the iPad there. In addition to Apple, the Taiwanese company has a number of high profile clients including Microsoft, Intel, Dell and Nokia. Apple's partnership with Foxconn, however, has not been without controversies. Foxconn has been in hot water over allegations of employee mistreatment and a string of employee suicides, the most notable one being a male employee who took his life after misplacing a prototype iPhone 4 in 2009.
Although Apple designs its products in-house and develops the software that brings devices to life, its' manufacturing and assembly is a wholly outsourced operation. Because the company relies so heavily on partners to deliver its end product, it faces the risk of risk of not being able to fully manage its supply process. In addition to its assembly process, Apple also depends on numerous other companies to provide the components that make up its final product. Although Apple doesn't reveal its component suppliers, the iPad's processor is licensed by ARM and manufactured by Samsung. The pads' IPS displays are produced by LG, NAND Flash by Toshiba and Samsung, and other components like batteries and PCB manufactured by other companies. Now while such partnerships are beneficial in producing a high quality device, they also highlight the company's technological dependency on other companies. Furthermore, any disruption that its component manufacturers suffer directly affects its own ability to get its product into the market on time.
Another risk posed to the company is over its brand value. Apple was recently awarded the title of the most valuable brand in the world and controversies like draconian working conditions, lax workplace safety and employee suicides that have plagued Foxconn could harm consumer perception. Early reports of the blast at Foxconn indicate that the blast took place at an iPad assembly line caused by combustible metallic dust and improper ventilation. Such events have the potential the cast Apple under public scrutiny over improper business practices, and harm the brand image that the company has carefully nurtured. While production of Apples iPhones, iPods and personal computers remain on track, the tablet segment represents a major revenue source for the company going forward. With a large number of competitor brands coming out with their own versions of tablet PCs, any pent up demand in the market due to the unavailability of Apple products could be easily filled up by rivals. Apple does enjoy immense brand loyalty and its status as the most valuable brand is evidence of this. In addition, it has the advantage of being the market leader in the tablet PC market while most other manufacturers playing catch up to the iPad. However, if it continues to struggle meeting product demand and other rival manufacturers are able to roll out technology in a more timely fashion, it could see customers migrating to other brands. This remains an imposing threat to Apple's dominance.
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