Is Apple's Obsession Becoming a Liability?

Apple (Nasdaq: AAPL  ) is obsessed. There. I said it.

The company seems intent to push envelopes as far as it possibly can, even to the point of bordering lunacy. If you've watched Apple's marketing video on the iPhone 5, Jony Ive describes just how obsessive the manufacturing process is and how variances are measured in microns. That's just one example.

In recent years, Apple has increasingly run into supply shortages of its products from time to time, having trouble keeping up with overwhelming demand. This storyline has increased in frequency in recent times -- often relating back to component constraints of ingredients that are rather hard to come by but Apple is intent on using.

Is Apple's obsession becoming a liability?

If you build it, they will buy
The new iMacs that were just unveiled uses a new manufacturing process where the display is fully laminated, eliminating the gap between the LCD and the glass to improve display quality. Apple claims the process has never been applied on displays this large, so it's effectively wading into uncharted waters.

Source: Apple.

In August , KGI Securities analyst Ming-Chi Kuo, who has been absolutely nailing it with iPredictions this year, said the full-lamination process on the 27-inch models was particularly challenging and that yields remained low. Kuo figured the 27-inch model would, as a result, launch six to eight weeks after the 21.5-inch model, since the smaller desktops were less affected.

It turns out that exactly how it's panning out, with the 27-inch models shipping in December after the 21.5-inch models start in November. In fact, consumers can't even buy an iMac directly through Apple right now online even if they wanted to and were willing to settle for the older model, so the company could potentially be missing out on some sales.

The silver lining here is that desktops aren't too important to overall results, at just 3.5% of revenue last quarter, so this can't really hurt Apple too much.

But this can
The iPhone 5, on the other hand, absolutely can hurt Apple a lot if supply constraints prove brutal. That product family was 48% of sales last quarter, so investors will definitely feel it if sales fall short. The display is likely a culprit again here. This time, we're talking about in-cell touch display technology, which eliminates the need for a separate layer of sensors since the functionality is integrated directly into the display.

Source: Apple.

Again, this cutting-edge technology is prone to low yields in the early days, even though Apple is tapping Sharp, Japan Display, and LG Display (NYSE: LPL  ) as suppliers. On top of that, Apple has reportedly stepped up quality standards with the aluminum chassis, making it difficult for its contract manufacturers to produce sufficient quantities.

We're now a third of the way through the fourth quarter, and the iPhone 5 is still constrained. New orders placed through Apple's site are still being quoted shipping times from three to four weeks.

Don't forget the little guy
NPD DisplaySearch thinks the new iPad Mini will also be hard to come by initially as production ramps up, with the most likely culprit being display yields. LG Display and AU Optronics (NYSE: AUO  ) are the two primary display suppliers. AU Optronics is a relatively new supplier and has faced some hurdles ramping up to the volumes that Apple demands.

White iPad Mini pre-orders quickly sold out just 20  minutes after they began, despite skepticism that the devices was priced too high relative to 7-inch rivals such as Amazon.com's (Nasdaq: AMZN  ) Kindle Fire HD or Google's (Nasdaq: GOOG  ) Nexus 7, both of which start at $199.

Not you again
Over the summer, the 15-inch MacBook Pro with Retina display also faced shortages immediately following its launch, again related to low yields associated with -- you guessed it -- display production. It wasn't until August that Apple was able to reach supply and-demand balance with these units. The 13-inch MacBook Pro with Retina display that was just launched was released several months after its bigger brother because of low yields again.

Fortunately, these units are in stock and don't appear to be facing shortages. Laptops were 15% of sales last quarter, more meaningful than desktops.

Get my drift?
In case you haven't picked it up by now, Apple's obsession with the best displays that use state-of-the-art manufacturing processes has become a risk in itself, if that results in supply constraints and unmet demand.

Don't just take my word for it. Apple lists it is a risk factor in its filings:

Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components that are available from multiple sources are at times subject to industrywide shortages and significant commodity pricing fluctuations.

It continues:

The Company's new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers' yields have matured or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to concentrate on the production of common components instead of components customized to meet the Company's requirements. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.

Source: 10-Q.

That's the bad news. The good news is that Apple carries unparalleled weight in the component market and does its best to lock down components with hefty prepayments, and Tim Cook is a supply chain wizard.

Apple's obsession with the latest and greatest is certainly a risk factor that's coming to a head right now as several of its newest products face shortages. However, since those products are well ahead of the competition and consumers are willing to stand in massive lines or wait weeks to buy, I think the net result is an asset, not a liability.

The iPhone and iPad now comprise nearly three-quarters of revenue, making them by far the two most important product families to Apple's future success. That's exactly why I've put together comprehensive reports on both of these growth magnets, included as a bonus in our Apple premium research service. In them, you'll learn everything you need to know about the iPhone 5 and how to profit on it, as well as just how massive the global iPad opportunity will be in the years ahead. Get started by clicking here.

Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. 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 (32) | Recommend This Article (30)

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 October 29, 2012, at 5:54 AM, H3D wrote:

    Apple's obsession with providing the best possible product technology allows, and pushing the technology envelope at the same time, it their greatest strength.

    Other companies assume that users buy purely on specifications so they set out to get the biggest numbers that they can in the specification.

    Take the processor. Most companies want the highest clock rate and most cores that they can get and will wave these about as advantages.

    But Apple's A6 consistently benchmark significantly faster.

    Or they try to distinguish themselves with the biggest possible screen. But a bigger screen means a bigger phone. Apple are content to stop at the sweet point for usability. But it has to be the best screen. And it is.

    Other vendors put in LTE as soon as it is available. Apple put in LTE as soon as it is practical in a small lightweight device.

    Now if I could find a journalist who was obsessed with reporting accurately and intelligently, rather than to get as many clicks as possible, I would read everything they wrote.

  • Report this Comment On October 29, 2012, at 9:37 AM, SaraW946 wrote:

    I couldn't agree more with you and couldn't put it better than that. I have actually begun collecting articles like this one, you know, the irrational Catch 22 kind, and am seriously considering publishing something on this at a later date. Someone should also compile a list of unreliable reporters.

  • Report this Comment On October 29, 2012, at 10:37 AM, FoolishLonghorn wrote:

    I have 1st hand knowledge of the challenges of being an Apple supplier. Apple is a horrible company to have as your customer, other than the checkbook.

    They make late changes, and demand you work your people 24/7, even over Christmas, They will pay huge money to overcome their own failings, but it's tough to sell that to the mom who will spend Christmas away from the family. And I have seen people quit rather than come in.

    My experience is that Apple is very arrogant, and really doesn't care. If you don't want to deal with them, they assume that someone else will.

  • Report this Comment On October 29, 2012, at 12:37 PM, Mathman6577 wrote:

    There is a great book written about Apple by Ken Segall "Insanely Simple: The Obsession That Drives Apple's Success". Yes .. they are obsessive.

  • Report this Comment On October 29, 2012, at 4:46 PM, Polyman7 wrote:

    Quality combined with Innovation in design and ergonomics is the major reason people are willing to buy Apple products, Media, especially the finaincal media is rather impatient and expecting a constant hockey stick share price to infinity !

    In the real world that is not feasible and the handful of companies that put their time and effort on share price burnt into space.

  • Report this Comment On October 29, 2012, at 4:54 PM, steveotto999 wrote:

    Yes they are obsessive and this is why I'm a fan. I'm putting in my iphone orders and also at least one ipad mini for christmas. Will I have to wait? Probably. I don't mind. I will be happy when they arrive.

  • Report this Comment On October 29, 2012, at 4:57 PM, steveotto999 wrote:

    To label product shortages due to demand outstripping supply as a liability is pretty funny. I bet you 100 shares of AAPL stock that companies like Dell and HP would love to have that sort of "liability".

    Many people love this obsession with quality and will wait and they will pay. Apple is redefining technology and tech business.

  • Report this Comment On October 29, 2012, at 5:03 PM, haysdb wrote:

    "My experience is that Apple is very arrogant, and really doesn't care"

    Apple cares deeply about their customers. They care much less about whether their suppliers and developers are happy. As a consumer of their products, I think they have their priorities correct.

  • Report this Comment On October 29, 2012, at 5:05 PM, MackDavid wrote:

    I think this article gives Apple too much credit. I have a MacBook and an iPod, and I have problems with both. The MacBook had to go back to the store on two occasions because the hard drive crashed, and then the battery swelled to the point where it was likely to rupture. The company took care of both issues, but the fact remains that quality was, and still is lacking. As for my iPod, it freezes up, for no apparent reason, and this happens quite often. It is usually when I am 20 minutes into my workout on the treadmill, and I have to stop and reboot the device on a regular basis. I work in QA, and I suspect that Apple is far more concerned with getting a product to market than it is with ensuring the quality of said products, through adequate testing. Furthermore, Apple cuts support for its operating systems in a relatively short timeframe. They longer I use Apple products, the more I realize that they really are no different than their competitors, except for the great strides they take to try and brush all of this under the rug. I admit they are good at PR, but they have a long way to go before I praise them for providing quality products.

  • Report this Comment On October 29, 2012, at 5:14 PM, johnluma wrote:

    SORYY BUT THE PURSUIT OF EXCELLENCE BY A COMPANY LIKE APPLE IS SOMETHING MANY MORE AMERICAN COMPANIES NEED TO DO. APPLE'S STRENGTH IS NO WEAKNESS -- IT FORCES THE SUPPLIERS TO DO THEIR VERY BEST. ONCE THEY GET USED TO THE "ZERO TOLERANCE" MANDATES REQUIRED THEY WILL HANDLE FUTURE DEMANDS IN STRIDE. LONG LIVE OBSESSIVENESS!

  • Report this Comment On October 29, 2012, at 5:15 PM, Bonefish100 wrote:

    I'll take Apple's obsessiveness with quality any day of the week. People can learn to wait a couple of extra days or weeks for something of quality.

    Let's contrast Apple with, say, Microsoft which continually upgrades their software...making it worse as it evolves. Try comparing Word 2007 with Word 2010, for example, for a study in frustration. All of the technophobes waiting in line for the next Apple release should learn to grow up a little bit and show a little patience. After all, you're getting the best of the best...

  • Report this Comment On October 29, 2012, at 5:41 PM, henjo wrote:

    Never thought I'd see the day when "QUALITY products" was a liability.

  • Report this Comment On October 29, 2012, at 6:02 PM, yugrus wrote:

    "...it's tough to sell that to the mom who will spend Christmas away from the family. And I have seen people quit rather than come in."

    So why don't they quit in the first place? There are PLENTY of talented people to take on the challenge.

  • Report this Comment On October 29, 2012, at 6:07 PM, xetn wrote:

    Apples problem is production; they don't gear up enough before releasing new products. Perhaps they need to pay more attention to forecasting demand and stocking for it, rather than pick some arbitrary release date without being prepared. This is not a quality issue, it is a management issue.

  • Report this Comment On October 29, 2012, at 6:28 PM, Darwood11 wrote:

    Then "Scott Forstall Out at Apple, Along with Retail Head, As Other Top Execs Get Promotions."

    Apple is in a commodity market. Think of it as selling jewelry on QVC. Yes, Tiffany's is also a brand name, and a lot of people make money. Ditto for Apple, which is attempting to be the "Tiffany" of its market. Like the Jeweler, a lot of people sweat to produce those baubles. Ditto at Foxconn.

    For Apple, "job one" is to pump up the product and promote the brand. That's the name of the game.

    Which stock will I buy? I'd suggest checking out where Scott Forstall is headed.

  • Report this Comment On October 29, 2012, at 7:18 PM, keahou wrote:

    The FOOL has consistently mentioned that Jobs said that he would spend Apple's last dime to keep copycats away. Well, Apple is a bit of a hypocrite

    in that they seem to have no regard for the patented property of others that make possible their products. A case in point is going to trial today: Civil Action No. 6:10-cv-417 down in Tyler TX. MSFT settled the same charges with the same Judge earlier paying VHC over $200 million. It is time for Apple to live by the rules. And there is AAPL's tax dodge http://www.finalternatives.com/node/21739

    Time for Apple to toe the line.

  • Report this Comment On October 29, 2012, at 11:24 PM, neamakri wrote:

    First read a book by W. Edward Deming on quality. Quality never "costs", it always pays back. Others can spend money on advertising or hiring celebrity endorsers or a nice paint job or a whisper campaign: they can't beat quality in the long run, ever.

    If apple has to hold up some orders for a few days because of quality concerns, it only enhances the customer's feeling that they are getting the best.

  • Report this Comment On October 30, 2012, at 12:18 AM, kahunacfa wrote:

    Apple is NOT overly obsessed with quality -- one of the very reasons why "the Cult of Apple" <i>True Believers</i> wait in long lines in-front of Apple Retail stores when Apple's new products are released. Apple products usually just work, right-out-of-the box.

    Me? I always wait for the dust to settle on the new product announcements and more often than not purchase the discounted prior version of the Apple product. In this case, the i Phone 4S -- NOT the i Phone 5. Besides the Apple products I use, I use WINTEL machines and computers running a version of the UNIX operating System.

    Kahuna, CFA

    Investment Professional

    1974 - Present

    Disclosure: Very large beneficial interest in Apple shares <cost = $5.125 per share>

  • Report this Comment On October 30, 2012, at 8:03 AM, LarryBright29 wrote:

    Is AAPLE a winning stock today?

    Good article on the issue published on Seeking Alpha:

    http://seekingalpha.com/article/960271-stock-picking-by-algo...

  • Report this Comment On October 30, 2012, at 9:36 AM, FoolishLonghorn wrote:

    Articles critical of Apple sure bring out the fan boys.

  • Report this Comment On October 30, 2012, at 9:43 AM, xLestatx wrote:

    Apple is becoming a joke. Big media Blitz for the "new IPAD" and 7 mos later they come out with another one? they don't sell the IPAD3's anymore? To upgrade your choice is to sell your IPAD 3 for under half of what you purchased it for. the IPAD Mini is also a joke. It has the slower processor and doesn't even have the retina display? Oh BTW anyone saying the Retina display is a minimal thing is lying, it's huge. So basicalyl those sheep standing in line for their mini is getting basically a mini IPAD2! Apple in the past did well "training" people to believe that you had to have the latest gadget. I've owned the Samsung Galaxy 3 which is as good if not better than the IPHONE. the money grab with a new device in 7 mos has left me with abad taste and people will grow tired of it. Even with the "newer IPAD" the only benefit is a beeter face time camera which most dont care about, supossed better WIFI which is questionable and the "lightining plug/cables". Maybe Howard Stern has to have every new item APPLE comes out with more and more people will catch on and grow tired of it or wise up

  • Report this Comment On October 30, 2012, at 10:42 AM, atthelakejim wrote:

    This is probably the dumbest article I have read on Fool. If Apple has a competitive advantage, it is that people believe in the reliability of Apple products.

  • Report this Comment On October 30, 2012, at 5:37 PM, LAVol wrote:

    Supply constraints are affecting iPhone 5 sales, but demand for the 5 is not nearly as strong as iPhone 4S according to the local ATT outlet. They get a limited supply of IPhone 5's, but they don't sell nearly as fast as iPhone 4S when it was released. Just not enough meaningful differences between the two. IPhone 5 has not "wowed" the iPhone 4S owners enough to make them want to upgrade in significant numbers.

  • Report this Comment On October 31, 2012, at 12:51 PM, 48ozhalfgallons wrote:

    "My experience is that Apple is very arrogant, and really doesn't care. If you don't want to deal with them, they assume that someone else will."

    Yup, I used to work with Kodak. 1989... same thing.

  • Report this Comment On October 31, 2012, at 12:53 PM, 48ozhalfgallons wrote:

    The Mini Mac is a $700 patch bay.

  • Report this Comment On October 31, 2012, at 11:33 PM, jfrankh57 wrote:

    Yes...when Apple was a young company, Jobs and Woz working together shortly after leaving their garage startup, I was an avid fan. My first two computers were Apple. Then Apple became arrogant...even towards its customers. Proprietary systems sound good until the customer wants to NOT buy from iTunes. An Apple cuts its own throat with its arrogance in alienating its customer base...but they are innovative enough to attract new customers...

  • Report this Comment On November 01, 2012, at 2:36 PM, TheRealRacc wrote:

    Apple just discontinued iMac SKUs and won't provide any further details until November or December. Expect another miss next season.

  • Report this Comment On November 01, 2012, at 5:40 PM, CajunRon100 wrote:

    You will not convince my daughter that Apple is obsessed with quality. A week after the warrantee expired on her i-phone the media audio stopped working....Apple's response?..."tough luck". AT&T's response after she paid $10/month for insurance..."We'll fix it for $250.00".

    Hows that for customer care and satisfaction!

  • Report this Comment On November 01, 2012, at 6:09 PM, buddyglee wrote:

    HD3 hit it on the money

    and for the bears, these products can malfunction . made by humans not gods

    and yes there is a warranty , but not after a year

  • Report this Comment On November 02, 2012, at 10:04 AM, Brent2223 wrote:

    5 years, prob 10 iOS devices - technical difficulties: 0.

    Upgrade laptop to Windows 8 this week - many blue screens of death followed by a restore to factory defaults.

    Ya, I'll choose obession any day. I must say I got caught up in Windows 8 - maybe this time they'll do something good. Microsoft is now off my stock watch list, I give up.

  • Report this Comment On November 02, 2012, at 2:35 PM, PlayaGroup wrote:

    That's why it's referred to as creative genius.

    I need not say anymore.

  • Report this Comment On November 02, 2012, at 3:09 PM, LevonTostig wrote:

    If not for Apple's obsessions, Samsung, Google and Microsoft would have nothing to copy.

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