Apple Looks to Fatten Supply Chain to Avoid Disruptions

Apple (NASDAQ:AAPL) has awarded a contract to Sharp to supply LCD screens for its next-generation iPad, which may be possibly launched next year. ^[1] Sharp already supplies LCD panels for Apple’s existing iPhones and will continue to do so for the next iPhone as well. Sharp’s competitor, Samsung also supplies LCD panels and is one of Apple’s biggest suppliers. Apple’s move to expand its suppliers shows that it anticipates demand for its tablets to rise in the coming quarters in a market segment where it competes with Research in Motion (NASDAQ:RIMM), Amazon (NYSE:AMZN) and other handset makers that use Google’s Android software.

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Move will strengthen supply-chain

The biggest risk to iPad’s business has been supply constraints rather than slowing demand as the company continues to see huge demand for its products. Apple faced problems in its supply-chain earlier this year following the Japanese earthquake, which had led to a supply shortage and consequently higher prices for many of Apple’s component suppliers. These issues resurfaced when one of its suppliers, Foxconn Electronics, reported that it was facing a shortage of both labor and material at its plants in China. (see Supply Chain Issues Resurface for Apple)

A recurrence of supply issues in the future may lead to Apple delaying the delivery of its orders, giving its competitors an opening to exploit. We believe the Sharp deal is Apple’s move to diversify its supply-chain as it looks to avoid a possible repeat of these issues next year. It will help Apple maintain its impressive iPad sales growth looking forward.

Margins will decline should supply issues re-emerge

Component supply shortages, may also mean that Apple will have to agree to absorb the additional costs related to components in exchange for smooth shipments, the same way it has countered such issues in the past. (see Apple’s Move to Absorb Higher Component Costs Will Help iPad 2) Apple’s gross margin for the iPad is around 30%, and we predict a steady decline in coming years as competition decreases tablet prices in the future. However, a recurrence of such issues may see its margins decline faster.

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1. Sharp to Supply LCD Panels to Apple for Next iPad, WSJ quoting people familiar with the matter, November 25th, 2011 [↩]