Quality Issues Plaguing Apple Lately
In a recent blog post just prior to the iPhone 5 release, we addressed the challenges faced by the global supply chain of Apple, and how the critical component and accessories segment should enforce stricter controls to maintain the type of quality Apple demands of its suppliers. Another component we need to consider is that the consumers of Apple products demand and expect a very high level of quality from Apple.
Since the iPhone 5 shipments began on September 21, albeit at a much slower pace than expected, we have been witnessing a myriad of problems or issues related to the entire supply chain. This has prompted many Apple fan sites, user forums, threads, investor forums, etc. to openly discuss and to a certain degree bash Apple. Why? Apple is not used to these types of quality issues, and this may be a crack in its armor for the first time. We have seen issues with the camera (purple haze problem), LED ‘leaking’ through the top layer, anodized aluminum slate finish easily getting nicked/scratched or signs of wear right out-the-box, etc.
As these problems arose, Apple ordered Foxconn, it’s major EMS for iDevices in China, to institute stricter quality control measures. This slowed down production, or yield significantly, which in return slowed down supply availability which affected millions of pre-orders, and stretched delivery times to 4 business weeks. To all the Apple consumers eagerly waiting for their beloved iPhone 5, it raised their ire and negativity towards Apple.
Supply chain was already stressed due to the shorter supply of the new in-cell technology panel as one of the suppliers was facing mass production issues. Add that to the tighter quality control standards, it further constricted iPhone supply. Another component internal to Foxconn, is the fact they employed under-age interns at its facilities, and this created a furor too. Despite that Apple had nothing to do with it, the pundits and general population connect Apple to Foxconn due to the ubiquitous nature of their relationship and the products they produce for Apple.
What does all this mean for Apple? The quality issues have created a PR nightmare for Apple, which is not just affecting iPhone. Foxconn is a major EMS for other Apple products including iPod, iPad, MacBook, Apple TV, etc. You do not want a consumer leaving the iPhone band, because it would take them away from the Apple ecosystem (App Store, iTunes, etc.). Negativity surrounding iPhone could spread to iPad (for which Apple holds 64% market share in the crowded field) and the soon to enter iPad Mini for the lower tier market. These problems have already wiped $60B off the market value of Apple (since Sept 21 to now) and eroded possible upside in the latest quarterly revenue and profit report. Managing quality issues is important for Apple, and it thrives on that reputation which allows them to charge premium pricing and maintain high overall margins (net approaching 40%). They cannot be seen as a commodity device brand, like Samsung, LG, or even Nokia.
What can and should Apple do? Apple needs to make sure that their critical suppliers are evaluated, audited and kept within a tighter collaborative environment through stricter supply quality management programs. The internal systems should be available to these critical partners from the initial phase through after market and logistics; provide access to the extended members to the common system for real-time interaction and finally define, manage and maintain a common, harmonized system to make decision making efficient and timely. Multiple systems or multiple processes do not help any members to provide timely resolution, while making sure costs are controlled, efficiencies maintained for economically accepted yields and product supply is maintained to appease the demand and provide sufficient cash flow for investor confidence. Apple will succeed, but these negative events are speed bumps on an otherwise smooth ride.
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