Once upon a time, Apple's (NASDAQ:AAPL) iPad ruled the tablet market with an aluminum unibody fist. After enjoying a first mover advantage, competitors scrambled to release their own competing tablets with few entrants enjoying even a modicum of success. Well, it turns out that no one wants the iPad anymore -- they just want the iPad Mini.
Told you so
Reuters reports that display supplier Sharp has reduced production of 9.7-inch displays for Apple, approaching a total halt of production. The anonymous supply chain sources say that production is at minimal levels. These same people couldn't say exactly why panel shipments have been dramatically reduced, but the most likely reason is strong consumer demand for the iPad Mini.
Tablet buyers also place high value on mobility, and the iPad Mini is far more mobile than the larger model. I've already predicted a mass shift toward the smaller device, after I was coaxed into trading down my full-sized iPad even though the iPad Mini's display is a bit lacking compared to the Retina display:
I now believe that the iPad Mini will become the dominant form factor for the iPad product family, because it embodies mobility better than the full-sized version and the tablet game has always been about mobility. More importantly, people don't buy the full-sized iPad just because of its 9.7-inch display -- they buy it because it's an iPad and it has superior build quality coupled with the most robust tablet content ecosystem.
That's why the iPad Mini will succeed, despite its premium pricing and relatively lackluster display.
BNP Paribas estimates that the iPad Mini will comprise 60% of total iPad unit shipments in the March quarter. The shift to the smaller model is happening rather quickly.
There was always a certain amount of cannibalization that was inevitable, as the iPad Mini starts at $329, a whole $170 cheaper than the $499 full-sized iPad. The good news for investors is that the iPad Mini carries a higher gross margin on every storage configuration, before including in other costs like software development, licensing, and distribution.
The gross profit per unit in dollar terms is less, but Apple should also be able to move more volume due to the lower price point. Apple had reportedly ordered up to 10 million iPad Minis in the fourth quarter.
There are also other possible explanations, none of which have negative implications on demand. Apple also taps LG Display (NYSE:LPL) and Samsung for 9.7-inch panels. Apple could be shifting orders to other suppliers. LG Display also sources most of the 7.9-inch iPad Mini panels too, and has been benefiting from Apple's shift away from Samsung where it can. Tablet panels comprised 15% of LG Display's sales in the third quarter.
There's also an expected seasonal drop-off following the busy holiday fourth quarter, so some order reductions are also par for the course there. A source at LG Display told Reuters that iPad display production was on a typical seasonal decline, without specifying whether or not it was referring to 9.7-inch or 7.9-inch panels.
In Cook we trust
Apple's global supply chain has an incredible number of moving parts, as it prefers to source from multiple vendors for almost all of the components it possibly can, reducing the risk of relying on a single supplier that can bottleneck and cripple product availability.
It's useful to glimpse into supply chain rumblings, but at the same time investors need to be careful not to put too much weight there and instead focus on the bigger picture. Apple's weakness throughout this week started when The Wall Street Journal speculated that iPhone 5 component order cuts had to indicate "weaker-than-expected demand," which would be scary if they were true.
However, when investors stop and dig deeper, there's little cause for concern (just like these iPad panel order reductions). The WSJ report was actually old news; the numbers hinted that Apple was simply double ordering to ensure supply and reducing those orders as yields improved, or could indicate that Apple is preparing for a new model in the summer since its orders typically cover the next since months.
Apple's supply chain and inventory management are unrivaled. Investors need to trust Tim Cook more.