Apple (AAPL) Shares Fall on iPhone Production Cutback

Prices for Apple Inc. (AAPL) stock fell by almost 2% after the publication of a report that stated the company would produce 10 million fewer models of its latest iPhone 13 due to chip shortages. 

Apple officials are cutting back on production orders with their manufacturing partners due to shortage of component deliveries from chip vendors Broadcom Inc. (AVGO) and Texas Instruments Incorporated (TXN), the Bloomberg report stated, quoting anonymous officials. 

Broadcom supplies display parts to Apple, while Texas Instruments is responsible for wireless chips in iPhones. As of this writing, Apple's shares are trading for $139.79, down 1.21% from yesterday's close.

A Perfect Storm

Apple introduced four new iPhones at a September launch event. It is scheduled to produce 90 million iPhones in the last three months of the year, per the Bloomberg report. But that figure might be difficult to reach due to a gamut of issues. 

Apple's predicament is the result of a perfect storm that has been gathering since March last year. Pandemic shutdowns have already created lingering supply chain bottlenecks in manufacturing and resulted in significant delays. Trading firm Susquehanna Financial Group estimated that lead times for semiconductors was an average 21.7 weeks in September.

The recent burst of shortage in energy fuels, and the accompanying increase in their prices, has further hamstrung operations at manufacturers and ballooned transportation costs for finished goods. For example, factories in China have begun shutting down during shifts due to power shortages. There has been a reported ten-fold jump in sea freight costs. Added to all this is the rise of the delta variant of COVID-19, which could further strain economic recovery and induce additional shutdowns.

Apple's problems in sourcing components and delivering finished goods are reflected on a broader scale across other industries. The automobile industry will suffer losses of $210 billion this year due to the chip shortage. Sports company Nike Inc. (NKE) cut its sales estimates to a "low single-digit increase" and blamed longer transit times and supply chain bottlenecks for the revision.

White House officials have also warned that there might be empty shelves at Christmas this year. "There will be things that people can't get," the official told Reuters.

Robust Demand for iPhones  

Initial reviews for the iPhone 13 are good, which means that demand for the device, Apple's flagship product, remains strong. "We estimate that overall demand has been robust globally," Wedbush analyst Dan Ives told Bloomberg. According to his calculations, the company will have a 5 million-plus shortage of iPhone 13 units for the holiday season "if consumer demand [for the phone] keeps up at this pace."

Apple could overcome chip shortages from vendors by relying on its in-house chip manufacturing unit. Over the past decade, the company has acquired more than a half-dozen semiconductor companies to realize its goal of building a vertically integrated stack in which it controls all aspects of production and manufacturing. In fact, Taiwan Semiconductor Manufacturing Company (TSMC), which makes chips for Broadcom, counts Apple as its biggest customer and manufactures the A-series processors outfitted in iPhones.

At a conference in May, TSMC's chairman told audiences that production capacity at its facility was "still bigger" than real market demand. He said that imbalances and uncertainty in the supply chain due to the pandemic and U.S.-China trade relations were responsible for the chip shortage.