This Is the Greatest Threat to the iPhone 5 --- and It's Not What You Think

The iPhone 5 launch on Wednesday, Sept. 12, is sure to be the most important event for tech investors this year. The Motley Fool will be hosting a live chat where our top tech analysts will answer your questions and break down what the announcement means for Apple and tech investors everywhere. Be sure to swing by Fool.com at 12:45 p.m. ET tomorrow for all your coverage of Apple's next big announcement.

The big day is tomorrow. On Wednesday, Apple (Nasdaq: AAPL  ) will be unveiling arguably the most important piece of new technology for all of 2012, the iPhone 5. Undoubtedly there will be a line around the corner at Apple stores when the device is released, and without question, various tech geeks around the world will be tearing it down within the first hour to see what companies made the cut and which didn't.

There is, however, one plain-as-day factor that many investors are overlooking that could become a death knell for the iPhone. If you're thinking it could be consumer demand, guess again, because there's an insatiable demand for Apple products among consumers. If the thought had crossed your mind that pricing or perhaps networking data-plan changes from AT&T, Verizon, or Sprint Nextel (NYSE: S  ) could alter sales, I'd also say guess again. Consumers have shown that they are more than willing to pay a premium for Apple's products, and Verizon and Sprint have been more than willing to crush their own margins by carrying the iPhone on their networks.

If you want to know what the real iPhone killer might be, all you have to do is look in the backyard of Apple's supply chain -- its production capacity.

Apple's silent killer
My Foolish colleague Evan Niu has postulated that total sales of the iPhone 5 could eclipse the combined sum of all iPhones sold to date. While I don't doubt this as a possibility, it could be this insatiable demand that creates a component scarcity among iPhone suppliers.

You might be thinking to yourself, "Apple's not stupid enough to rely on one manufacturer for certain components of its iPhone, so the chances that this will happening are slim to none." Yeah ... not so fast with that train of thought.

Things didn't go very smoothly when the iPhone 4 first came to market – specifically the white iPhone 4. Glass manufacturer Lens Technology had multiple problems with its tedious manufacturing process in getting the thickness and opacity of the glass correct in the iPhone 4, causing delays. And as we all know, delays mean lost revenue.

Potential kinks in Apple's supply chain
Apple has been pretty good about spreading around its production capacity such that no one vendor controls the majority of production. A pretty good job, though, isn't a perfect job, and there are a few factors that could still come back to bite Apple.

For one, Apple has been unsuccessfully trying to persuade fabless semiconductor manufacturer Taiwan Semiconductor (NYSE: TSM  ) to commit to giving it more production capacity. Both Apple and Qualcomm (Nasdaq: QCOM  ) use Taiwan Semi in a big way to fab their chips. In fact, Apple solely used Qualcomm as its cellular baseband processor in the iPhone 4S. This means there's the potential that Apple is actually cannibalizing its own supply chain by attempting to garner more capacity from Taiwan Semi.

There have also been very visible production concerns with the rumored new in-cell liquid crystal display screen, which is being manufactured by three different companies. Among them, Sharp is already reported to be having significant production problems and may not be able to meet its mass production target. According to The Wall Street Journal, LG Display (NYSE: LPL  ) and Japan Display, the other two LCD suppliers, have already begun shipping their LCD screens in bulk. In previous years, Samsung had supplied the vast majority of Apple's iPhone LCDs, but with Apple purportedly moving away from Samsung, it's going to be interested to see how well these three other LCD-makers pick up the slack. Needless to say, there are serious concerns about whether there will be enough LCD screens available to meet initial iPhone 5 demand.

Finally, there are the concerns that no one can prevent or foresee – natural disasters. Japan has mostly recovered from its devastating earthquake in March 2011, and manufacturers in Thailand are back up to capacity for the most part, but who's the say this won't happen again in the near term? I know this is sort of vague, but considering that Japan sits on one of the most active earthquake zones on the planet, it's a very reasonable hypothesis. Sony, Hynix, Wintek, Avago Technologies, and Foxconn parent Hon Hai Precision are all component suppliers to the iPhone 4S that stand in the path of potentially disruptive cyclones and earthquakes that regularly seem to devastate Asia. You may think I'm blowing smoke where there's no fire, but go and have a look for yourself at what happened to regional earnings shortly after the Japan earthquake and for electronics companies globally after Thailand flooded, and you'll see it's a serious issue.

Foolishly thinking
I hope the iPhone launch goes off without a hitch, as I'll be one of the faithful waiting to upgrade my current 3GS. However, there are notable capacity issues that could cause the iPhone launch to be less than stellar.

What do you think? Will this iPhone launch be the greatest thing since sliced bread, or am I shooting fish in a barrel for no reason? Let me know in the comments section below.

As an Apple junkie, clearly I have my biases. If, however, you want a no-nonsense, unbiased, and in-depth take on what opportunities and pitfalls could affect Apple over the long term, then consider getting your copy of our latest premium research report on Apple. This report also comes complete with a full year of regular updates. Claim your investing edge now.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Apple and Qualcomm. Motley Fool newsletter services have recommended buying shares of, and creating a bull call spread position in, Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2012, at 7:46 AM, jdmeck wrote:

    So lets all just give up, curl up, and die. The world may end tomorrow, and then there really will be supply problems.

  • Report this Comment On September 12, 2012, at 12:42 PM, Giggity101 wrote:

    I'm not sure I agree that this is the 'greatest' threat. Every company is envious of having the problem of not being able to 'build 'em fast enough'. I don't see that as a threat. Sure, these bottlenecks (relatively speaking) may hinder revenue in the short term, but I don't think those of us who have been holding off (me since Feb '12) upgrading will jump ship if we have to wait another few weeks for supply to catch up.

  • Report this Comment On September 12, 2012, at 12:51 PM, sandmanfool wrote:

    As an iPhone user, and absolute fan of the 4S device I already own, I think iPhone 5 will vastly under perform projections. It will be a successful launch by all normal business views, but it will not be the blockbuster it's envisioned to be. As someone who moved from the 3 to the 4 and then to the 4S, there's not much more I need from the device in terms of hardware, and I'm a power user. A larger screen might be nice in some scenarios, but the existing device fits nicely in my pocket, and I already have an iPAD if I need a bigger screen. Lots of folks I work with feel the same way. Nobody seems to be talking about the possibility that the 5 won't be a blockbuster. What I've learned in business and investing is that when all the experts start becoming fans and universally predict an avalanche, be very wary.

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