When it comes to the electronics market, Apple Inc. (NASDAQ:AAPL) is large enough that some of its actions have a direct impact on the rest of the business niche in which it operates. Somewhat like a force of nature, its larger operations alter the conditions under which rival firms carry on their own business. Currently, there are signs that the sheer scale of Apple’s iPhone 6 orders might tie up so much Taiwanese manufacturing capacity that competitors’ prices will be forced upward by 5%, and perhaps as much as 10%.
According to several reports running in the Chinese news, as reported in the United States by G for Games, Apple’s production schedule for 2014 may use up so much manufacturing “bandwidth” that competing companies such as Samsung, Nokia, and Xiaomi may see their costs rise sharply as they compete for the limited “scraps” of factory capacity “left over” after Apple (AAPL) claims their share.
Similar events have not happened before, and in all previous years, manufacturers such as Pegatron and Foxconn have had spare manufacturing capacity and therefore sought orders by offering lowering prices to Apple’s competitors, too. However, Apple’s orders have reached a level never seen previously in 21st century electronics history.
The Cupertino-based enterprise is retooling its extremely popular iPhone smartphone line to add not only a new generation (iPhone 6) but also two new screen sizes also. These include a 4.7 inch expanded version and the 5.5 inch “phablet” (or “phone-tablet hybrid”) model. Apple expects a torrent of upgrade purchases as long-suppressed demand for larger iPhones expresses itself in a frenzy of buying even among those who would ordinarily wait until later in the product cycle before upgrading to the iPhone 6.
Faced with Apple locking up the semiconductor manufacturing and electronics assembly sectors of Asia, the American company’s competitors would appear to have a choice between absorbing the extra costs themselves, or passing them on to their own customers. Neither choice, of course, is optimal.
If Apple’s rivals internalize the extra costs, they risk pushing their margins from the black into the red, forcing borrowing that will harm their effectiveness in the future and possibly cause some investors to sell off shares. If they externalize the costs and raise retail prices by 10%, they risk losing some of their customer base to other firms or slowing their sales, again cutting into margins. Apple’s (AAPL) move to meet its own demand may have the happy side effect (from Apple’s own perspective, of course) of putting a temporary spoke into the wheel of its adversaries, too.
