With less than a month until the anticipated release of major OEM smartphone and tablet PC devices, the buzz is intensifying, the supply chain is busy, and inventory calculators are showing signs of stocking in advance of the releases. From devices to service packages for smart devices, pricing is at the forefront and those competing for higher-priced devices are going to have to show consumers more reasons to upgrade than before, as refresh cycles have slowed.
The impact of the reduction in chip manufacturers, the increased competition for smart devices, and the expanding markets for new consumers are showing clear signs of supply chain changes for the semiconductor and electronics industry. If we consider what is happening at TSMC, for example, who is now a major supplier to Apple for their CPUs, we see the most recent DigiTimes report noting that TSMC is likely to increase their Apple orders, meaning that others will be forced to book wafer orders even earlier than before. As DigiTimes cites:
TSMC has advised its other customers to place more orders in the first half of the year, in order to avoid competition for wafer production capacity with suppliers for Apple related products, the sources noted.
Some IC suppliers for not-Apple mobile devices apparently have not taken the advice and have continued placing follow-up orders in the second half of 2014, prolonging the tight production schedules at TSMC into the end of the year, said the sources.
To prevent tight production from recurring in 2015, TSMC is expected to persuade suppliers of non-Apple devices to place wafer orders in the first half of 2015, preferably in the first quarter, indicated the sources.
This situation clearly warns of significant supply chain pressures, with supply issues to tighten in 2015. The number of leading-edge chip manufactures has reduced over recent years due to costs for upgrades to equipment and facilities resulting from shrinking nodes and architectures that have become increasingly complex. While this situation is showing stable and generally in-line inventory levels on the global scale, the underlying reasons might cause significant pressures when it comes to supply in 2015 and forward. Efficiency is critical to best manage inventory and bookings so many companies have been more conservative in booking because of concerns over rapid market changes and demand fluctuations.
Device wars designed to tempt consumers
The competition for wafers is not the least of the challenges facing OEMs in the smart device categories; albeit the bigger the OEM, the more commanding they can be of production guarantees. The heavy-weight upstream supply chain advantages that the likes of Samsung and Apple have might not be enough downstream at the register when the consumer compares devices and prices.
Apple is placing a notable bet on screens, specifically the material of their screens as has been reported on quite a bit lately by the Wall Street Journal. According to WSJ reports, Apple has invested US $700 million on sapphire screens for the high-end upcoming iPhone devices to help consumers ward-off those broken glass screens that we all see handled. With these new shatter-resistant screens, again, there is another potential supply headache because suppliers are few. The issue, as WSJ summarizes, is quite clear and risky, but could be a win at the register for Apple:
[Corning] has proven that it can meet Apple's demands to speed production and churn out millions of phones ahead of a new product release. If Apple and GT run into problems producing sapphire on a large scale, that could throw a wrench into Apple's supply chain, creating shortages during peak demand. It also isn't clear that sapphire will outperform current materials in real-world use.
Analyst Mr. Virey estimates that a sapphire screen could cost $16 to produce, compared with about $3 for Gorilla Glass.
Materials as prime features is obviously part of the current high-end smartphone strategy, as we saw with Samsung's bet on a new metal frame for their new Galaxy Alpha device, as reported by ComputerWorld.
The question for the fall device unveilings is whether or not consumers will feel that the material changes being offered offset the still high-prices for these high-end devices, particularly if other features are not significantly improved.
Global competition is focused on mid- to lower-priced devices
Meanwhile, there is the ongoing battle for the mid-range and especially the lower-priced devices globally. Emerging markets are absolutely heating up, and once-leading mobile OEMs, like Nokia and Motorola, are now back in the fight for these device segments.
One twist that we are starting to see, which is rooted in solid diversification strategies, is the marketing of low-priced, limited-featured mobile phones not just for first time consumers in developing and emerging markets, but, importantly, as a back-up device for existing, high-end device owners in the developed markets. One prime example of this compelling strategy is the recent US $25 mobile phone from Nokia, the Nokia 130, with dual sim-card slots for multiple lines that far outpaces any smartphone's battery life, giving you 36-days of stand-by time and 13 hours of talk time – making that the strong selling point, as reported by CNN this week.
Notably, behind these seriously-competitive, low-cost, budget mobile devices from Nokia and those expected from Motorola is the fact that these brands are now owned by Microsoft and Lenovo, respectively. What's important about this point is that as competition heats up for end-markets, and supply chains tighten for supply and for wafer utilization orders, the major companies will have supply chain weight advantages. While we are seeing changes in the line-up of smartphone leaders from the likes of Lenovo, as reported by WSJ this week, and from Xiaomi and Huawei, it is important to note what supply chain weight new competitors can carry. We will see increased competition, but the question is, will that competition come from truly new companies, like Xiaomi, or primarily from major, global OEMs?