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Apple reportedly 'demands' 10% price cut from key iPad suppliers as orders increase

post #1 of 70
Thread Starter 
Apple is said to be pressuring its overseas supply chain to reduce prices by 10 percent on component orders for the hot-selling iPad 2.

The iPad maker is said to have "demanded" suppliers cut their prices, as Apple believes they are due to cash in on surging sales of the touschreen tablet. According to DigiTimes, component makers reportedly expect Apple to ask for more cuts again in the third quarter of 2011.

"Since Apple's tablet PC shipments are expected to grow 70% sequentially to eight million units in the second quarter, significantly benefiting related upstream component suppliers, Apple has demand(ed) its suppliers to provide cuts in return," the report said, citing the Chinese-language Economic Daily News.

Apple has reportedly made the demands to companies that supply it with printed circuit boards, optical components, battery modules and touch panels. It wants quotes for the second quarter of 2011 to be cut by 10 percent.

Earlier this month, Apple revealed that total iPad sales had reached 25 million in just 14 months. That total also suggested that the company is on pace to exceed sales of 8 million iPad 2 units this quarter.



In its last fiscal quarter, Apple reported sales of 4.69 million iPads, a number that came in lower than Wall Street expectations of the iPad 2 launch. But the company's chief operating officer, Tim Cook, admitted that his company was struggling to meet demand, characterizing the situation as "the mother of all backlogs."

In March, it was suggested that supply issues for touchscreens could result in a higher cost to Apple for components. The touch display on the new iPad 2 was estimated to cost Apple $127 for each device, an increase of more than $30 from the first-generation iPad.
post #2 of 70
greed

gotta love it....
post #3 of 70
Is this a prolog to the Cook era? This is his area now.
post #4 of 70
Quote:
Originally Posted by frugality View Post

greed

gotta love it....

yeah those factories have no soul, trying to make as much as possible of these iPads I tell you!
Apple had me at scrolling
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Apple had me at scrolling
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post #5 of 70
Apple has to try to maximize savings.
It's not like Apple has $70 billion sitting around or anything. Oh, wait.

Does anyone think Apple will drop the price 3%?
post #6 of 70
Last time I checked my econ book, it said that when demand outstrips supply, the cost of the items go up accordingly. Only someone as strong as Apple can attempt to upend that truism, and have enough clout to back it up. Only Apple, having alternative suppliers, will keep this supply-side price creep in check (hopefully).

Also, keeping other suppliers working (secretly) on the next iterations of the components, keeps the suppliers from raising the price through the roof, lest they get completely frozen out of the next great products.
post #7 of 70
Quote:
Originally Posted by frugality View Post

greed

gotta love it....

How do you know that Apple is demanding this now, in violation of signed contracts.

As opposed to it being in the contract from day one and there's really no 'demands' at all.

You don't.

It's not uncommon for prices to be dependent on the volume being bought so it is very possible that the high demand has increased order volumes and invoked a preset drop in per unit pricing that both sides agreed on when they signed.
post #8 of 70
Sounds purely speculative. Although if true, I'm fine with it.

Proud AAPL stock owner.

 

GOA

 

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Proud AAPL stock owner.

 

GOA

 

Get the lowdown on the coming collapse:  http://www.cbo.gov/publication/45010

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post #9 of 70
Sure, I would have preferred my iPad to have only cost $99.... or even $299... but I was okay with a refurbished iPad 1 for $349 and I figure I'll upgrade to an iPad 3 _ 3g for $629 when it comes out. Maybe rather than demanding lower prices from the suppliers, they could work on improving the quality of work conditions & wages by 10%.

But hey... doing something good for humanity like that is too much like communism... and corporations value only about 1 thing. Money.
post #10 of 70
Quote:
Originally Posted by Bagman View Post

Last time I checked my econ book, it said that when demand outstrips supply, the cost of the items go up accordingly. Only someone as strong as Apple can attempt to upend that truism, and have enough clout to back it up. Only Apple, having alternative suppliers, will keep this supply-side price creep in check (hopefully).

I think most posters aren't factoring in the concept of quantity discounts. In most businesses I know, the more you order, the less an item costs. Since the iPad II is selling like hotcakes, Apple is going back to their vendors and asking for price decreases based on their increased purchases. This doesn't seem unusual to me.
post #11 of 70
So when demand tails off I guess they will happily pay more?
But seriously, they must have made price agreements based on volume projections and I guess the actual demand took them by surprise.
post #12 of 70
This is a pretty standard procedure in business. There are companies that squeeze manufacturers to the point where they aren't making any money.

Sears, in its heyday, used to go to a small manufacturing company and say we need 500,000 widgits, what's the price? Say Ok, let the small company spend a ton of money buying new equipment, expanding the plant, hiring people, etc. and then come back the next year with a "suggested new price!" Usually, well below the original price. The small manufacturer was forced to accept it and basically was just wearing out their "new" equipment while Sears was sitting pretty.

Walmart has a similar reputation.
post #13 of 70
Quote:
Originally Posted by sportyguy209 View Post

I think most posters aren't factoring in the concept of quantity discounts. In most businesses I know, the more you order, the less an item costs. Since the iPad II is selling like hotcakes, Apple is going back to their vendors and asking for price decreases based on their increased purchases. This doesn't seem unusual to me.

Yes, I recognize that volume discounts are at play here, and certainly make supply and demand projections difficult. Luckily, the volume is high enough, and alternative suppliers are available elsewhere, to make such cost reductions possible - for if you are the only supplier (and can foresee being so for a long time) you can refuse such requests to reduce your price, regardless of the volume supplied. Hopefully, such monopolistic suppliers are few, and Apple diversified enough, to keep things in reasonable check.

Also, as I mentioned earlier, what supplier wants to get on the wrong side of Apple, and get frozen out forever on future products? They might have to turn to (god forbid) Microsoft (aka Nokia), RIM, HP, or whoever.
post #14 of 70
In the mid-nineties I knew someone in parts acquisition at Boeing who was given a miserable task. Thinking perhaps like Apple is now thinking, Boeing ordered her to call up suppliers and tell them that Boeing would now be paying them 10% less for their products. Boeing's upper management no doubt thought it was being "oh so clever."

Fast forward a decade and the business news was filled with Boeing's problems getting parts from their suppliers on time and up-to-spec. That's one of the key reasons why the 787 is being delayed for two years and more.

Did those suppliers wait for the right moment to extract their revenge on Boeing? Perhaps. But it is also true that by cutting their income, Boeing also made it harder for those companies to upgrade their equipment and retain talented employees. Boeing was simply reaping what it had sown a decade earlier. And yes, when Boeing's woes began to multiply, there was probably little sympathy among those tightly squeezed suppliers--no good will it could call on.

Much the same could happen with Apple's suppliers and assemblers. Keep in mind that there is often no decline in costs as demand rises. Increased demand can mean needing to build new factories and train new workers. Perhaps Apple should be paying more rather than less. It's growing muscle hasn't been matched by a larger heart.

I've said this before in similar contexts, but I'll say it again. Success is as much a test of character as adversity. If you've always been greedy and a bully at heart, getting richer and more powerful will make that all the more obvious. Something has been going badly wrong at Apple since its market share began to grow rapidly half a decade ago. This is one of the unfortunate symptoms.

--Michael W. Perry, author of Untangling Tolkien, Seattle
post #15 of 70
I'd tell them no. I'd be like what you want our stuff, pay our prices. Taking your business elsewhere? Ok, let me know how their inferior products work, like light leakage.
post #16 of 70
Quote:
Originally Posted by sportyguy209 View Post

I think most posters aren't factoring in the concept of quantity discounts. In most businesses I know, the more you order, the less an item costs. Since the iPad II is selling like hotcakes, Apple is going back to their vendors and asking for price decreases based on their increased purchases. This doesn't seem unusual to me.


Once in a while someone who actually thinks posts to this forum.

What a majority of the others don't understand is that a public company has a fiduciary duty to maximize return on their shareholder's investment. What Apple is doing is common business practice.

It's called negotiation. A big player like Apple can throw their weight around a little bit. There are a lot of suppliers poised to make a lot of money off of Apple's success.

Thank you, Sportyguy

Why does Apple bashing and trolling make people feel so good?

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Why does Apple bashing and trolling make people feel so good?

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post #17 of 70
Quote:
Originally Posted by Joseph L View Post

If it had already been agreed upon, there would be no need for Apple to make a new "demand". Therefore, it seems unlikely that the price reduction was already agreed to. If it had, this would be a job for the guys in accounting.

Its a new contract. How hard is that to understand?
post #18 of 70
Quote:
Originally Posted by Bagman View Post

Last time I checked my econ book, it said that when demand outstrips supply, the cost of the items go up accordingly. Only someone as strong as Apple can attempt to upend that truism, and have enough clout to back it up. Only Apple, having alternative suppliers, will keep this supply-side price creep in check (hopefully).

Also, keeping other suppliers working (secretly) on the next iterations of the components, keeps the suppliers from raising the price through the roof, lest they get completely frozen out of the next great products.

how it really works is that when there is more products purchased suppliers can give you lover price as in the large amount they still make noticable profit. its like when you go to a currency exchange that is not trying to rip you off a shitload, if you exchange 100 euro the rate will not be the greatest, but when you echange 12000 euro, the rate will be really good because on that amount the currency exchange place can still make good profit...
post #19 of 70
Quote:
Originally Posted by Inkling View Post

In the mid-nineties I knew someone in parts acquisition at Boeing who was given a miserable task. Thinking perhaps like Apple is now thinking, Boeing ordered her to call up suppliers and tell them that Boeing would now be paying them 10% less for their products. Boeing's upper management no doubt thought it was being "oh so clever."

Fast forward a decade and the business news was filled with Boeing's problems getting parts from their suppliers on time and up-to-spec. That's one of the key reasons why the 787 is being delayed for two years and more.

Did those suppliers wait for the right moment to extract their revenge on Boeing? Perhaps. But it is also true that by cutting their income, Boeing also made it harder for those companies to upgrade their equipment and retain talented employees. Boeing was simply reaping what it had sown a decade earlier. And yes, when Boeing's woes began to multiply, there was probably little sympathy among those tightly squeezed suppliers--no good will it could call on.

Much the same could happen with Apple's suppliers and assemblers. Keep in mind that there is often no decline in costs as demand rises. Increased demand can mean needing to build new factories and train new workers. Perhaps Apple should be paying more rather than less. It's growing muscle hasn't been matched by a larger heart.

I've said this before in similar contexts, but I'll say it again. Success is as much a test of character as adversity. If you've always been greedy and a bully at heart, getting richer and more powerful will make that all the more obvious. Something has been going badly wrong at Apple since its market share began to grow rapidly half a decade ago. This is one of the unfortunate symptoms.

--Michael W. Perry, author of Untangling Tolkien, Seattle

There are actually so many new, and relatively untested, technologies involved in the 787 as to make your argument somewhat specious, but we certainly get your point. Hopefully, Apple recognizes what suppliers need to receive in order to prosper - it does Apple no good at all to drive a company out of business, but, in the technology arena, many competing suppliers reward the most cost efficient, and economies of scale drive down your costs - so Apple can reasonably expect to have costs reduced, based on volume. Tim Cook is a master of logistics, so I would expect that he has the expertise to walk this tightrope just fine, and his recently completed supply contracts seem to indicate he is doing just fine.
post #20 of 70
Quote:
Originally Posted by frugality View Post

greed

gotta love it....

I think it's a bit nastier (and reflects more poorly on you), that this is the first thing you thought of.

It isn't necessarily the only explanation after all.

The first thing I thought of is that since Apple's profit margin is almost always a flat 30% regardless of product type or availability, the savings are likely aimed at getting a cheaper iPad in the hands of consumers, not more money in Apple's coffers.
post #21 of 70
Quote:
Originally Posted by Inkling View Post

In the mid-nineties I knew someone in parts acquisition at Boeing who was given a miserable task. Thinking perhaps like Apple is now thinking, Boeing ordered her to call up suppliers and tell them that Boeing would now be paying them 10% less for their products. Boeing's upper management no doubt thought it was being "oh so clever."

Fast forward a decade and the business news was filled with Boeing's problems getting parts from their suppliers on time and up-to-spec. That's one of the key reasons why the 787 is being delayed for two years and more.

Did those suppliers wait for the right moment to extract their revenge on Boeing? Perhaps. But it is also true that by cutting their income, Boeing also made it harder for those companies to upgrade their equipment and retain talented employees. Boeing was simply reaping what it had sown a decade earlier. And yes, when Boeing's woes began to multiply, there was probably little sympathy among those tightly squeezed suppliers--no good will it could call on.

Much the same could happen with Apple's suppliers and assemblers. Keep in mind that there is often no decline in costs as demand rises. Increased demand can mean needing to build new factories and train new workers. Perhaps Apple should be paying more rather than less. It's growing muscle hasn't been matched by a larger heart.

I've said this before in similar contexts, but I'll say it again. Success is as much a test of character as adversity. If you've always been greedy and a bully at heart, getting richer and more powerful will make that all the more obvious. Something has been going badly wrong at Apple since its market share began to grow rapidly half a decade ago. This is one of the unfortunate symptoms.

--Michael W. Perry, author of Untangling Tolkien, Seattle

With friends at Boeing, the key reason was design and implementation of new materials failing to meet requirements of the design is what slowed down the 787 roll out, not because they were waiting 2.5 years on a part. There were flaws in the design and materials chosen that were different from their past.
post #22 of 70
Quote:
Originally Posted by christopher126 View Post

This is a pretty standard procedure in business. There are companies that squeeze manufacturers to the point where they aren't making any money.

Sears, in its heyday, used to go to a small manufacturing company and say we need 500,000 widgits, what's the price? Say Ok, let the small company spend a ton of money buying new equipment, expanding the plant, hiring people, etc. and then come back the next year with a "suggested new price!" Usually, well below the original price. The small manufacturer was forced to accept it and basically was just wearing out their "new" equipment while Sears was sitting pretty.

Walmart has a similar reputation.

These companies also started making inferior parts to meet the newly negotiated pricing. Apple knows their supply chain pretty well. I don't think they would make demands on future orders that are not sustainable. Most likely the components are getting easier to make (higher yields) or the equipment investment for current generation parts has been met. This is typical for electronic components. This isn't quite the same situation because the component industry changes so fast that they need new equipment every year or two. Why not run the equipment for the old parts in to the ground?
post #23 of 70
Quote:
Originally Posted by frugality View Post

greed

gotta love it....


Sure. You never bargain over money. Never look for sales, never ask for a raise. That would make you greedy.
post #24 of 70
deleted
post #25 of 70
Quote:
Originally Posted by ghostface147 View Post

I'd tell them no. I'd be like what you want our stuff, pay our prices. Taking your business elsewhere? Ok, let me know how their inferior products work, like light leakage.

Which may suggest a reason why you are where you are and Apple is where Apple is. These guys are probably selling everything they make because of Apple's business. Name any business where if you said "We'll buy your entire output for a 10% price cut." "Done!" is the response 9.9 out of ten times.

No wants to leave money on the table.
post #26 of 70
Quote:
Originally Posted by MacRulez View Post

Well said.

When we used to hear stories like this about Microsoft, Mac fans would call it bullying.

Now Apple is the new Microsoft, and fans give 'em a free pass....

Apple is running companies out of business buy giving away software?
Apple is bundling the browser to the OS?
Apple is creating hidden APIs that make their stuff run faster, but doesn't give equal access to third parties?
Apple is forcing HW vendors to sell their software in exchange for having access to their OS?

All Apple is doing is what you and I do...negotiate over costs. I suspect that you've told Store X that Store Y has a cheaper price and you'll buy from Store X if they match it.
I also suspect that you've negotiated your salary more than once.

Well, I guess that's bullying!
post #27 of 70
Quote:
Originally Posted by frugality View Post

greed

gotta love it....

And just a few forum posts back, everyone was celebrating Apple's $70 billion cash pile.

"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
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"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
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post #28 of 70
Standard business, push vendor to edge and pull back just a little. This was perfected was perfected by GM many years ago. It is still used as an example in most sales negotiating classes to this day....

Of course in this situation, I suspect that the vendors have the upper hand with supply disruptions cause by the disaster in Japan...

I suspect ( do not know ) that this is a preemptive strike by Apple to prevent the vendors from raising the prices due to the disaster. Apple is trying to set the bracket for negotiation with the mind set that higher prices are not even going to be considered. If the vendors are smart ( and you can bet they are ) they will respond with. It will only be a small price increase....

I find it amusing that most people always assume that the buyer ( Apple in this case ) has more power. In long term supply commitments, the seller often has more power then the buyer. I mean how many companies can product enough components ( with quality in tact) to keep Apple supplied? Obviously right now no one can or Apple would not have a backlog....
post #29 of 70
There is an obvious danger here if Apple pursue this strategy too aggressively. A big part of their brand and focus on 'user experience' has been the high quality threshold of their hardware. Of course there are failures, that's inevitable, but relatively not many people who buy an Apple gizmo have to return it because of component failure. If a supplier is pushed to the limit, there will be a temptation born of necessity to cut a few corners and risk increased failure levels just to maintain viability. That may lose them the Apple contract in the long term, but in the mean time Apple would be selling more duds. I would like to think that the Apple board would also look at leveraging their phenomenal success to reduce the percentage of failures as well as the cost per unit of production.
Believe nothing, no matter where you heard it, not even if I have said it, if it does not agree with your own reason and your own common sense.
Buddha
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Believe nothing, no matter where you heard it, not even if I have said it, if it does not agree with your own reason and your own common sense.
Buddha
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post #30 of 70
Quote:
Originally Posted by Joseph L View Post

Samsung to Apple: "Go pound sand. Try to sell more iPads without our parts! Good Luck!"

Hey LG, you want to be Korea's number one component supplier?
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post #31 of 70
Quote:
Originally Posted by Joseph L View Post

And now Apple? Great...

Apple pre-pay the supplier for equipment and expansion. That's the difference.
post #32 of 70
Quote:
Originally Posted by hill60 View Post

Hey LG, you want to be Korea's number one component supplier?

And how long will it take LG to ramp up production to meet Apple's needs... This kind of production jump does not happen over night...
post #33 of 70
Quote:
Originally Posted by hill60 View Post

Hey LG, you want to be Korea's number one component supplier?

LG to Samsung: HA, HA
post #34 of 70
Quote:
Originally Posted by Bagman View Post

Last time I checked my econ book, it said that when demand outstrips supply, the cost of the items go up accordingly. Only someone as strong as Apple can attempt to upend that truism, and have enough clout to back it up. Only Apple, having alternative suppliers, will keep this supply-side price creep in check (hopefully).

Also, keeping other suppliers working (secretly) on the next iterations of the components, keeps the suppliers from raising the price through the roof, lest they get completely frozen out of the next great products.

Yes, as someone else pointed out, this is NOT supply and demand. True the market as whole typically behaves this way. As demand for a limited amount of flash memory increases, prices increase, for example.

This is between a manufacturer and a supplier. Apple says to Samsung (or whomever), if you give it to as at 85% the normal price, we'll buy 10 million from you. Samsung secures enormous, dependable business and Apple secures cheaper prices. Now, all Apple is doing is saying, "Look - we promise to buy 20 million more from you over the next 12 months if you give it to us at 75% instead."

Kinda like Costco.
post #35 of 70
deleted
post #36 of 70
Apple paid a premium to bring additional capacity online quickly from their suppliers. They now want that premium back since they have expanded the market for their supplier's devices. They started out absorbing the margin, and now want to make their profit. Fair game.
post #37 of 70
Quote:
Originally Posted by MacRulez View Post

Apple isn't in Redmond either.

Let me help you out:
http://dictionary.reference.com/browse/metaphor


I never said every criticism from Mac fans against Microsoft was justified, just enjoying another day here in Doublestandardland.

Give me a definition of double-standard while you are at it. All I see is price negotiations.
post #38 of 70
OK I read all the comments here and not one mentions that Asian manufacturing play by their own rules in business. They are much shrewder in negotiating price than western business. If they are ready to deal at x prices, they already built in the discount beforehand. They expect you to ask for it and if you don't, they see that as weakness. They respect strength (not greed) in negotiation. Apple is playing the Asian markets as an Asian would.
post #39 of 70
Quote:
Originally Posted by Prof. Peabody View Post

The first thing I thought of is that since Apple's profit margin is almost always a flat 30% regardless of product type or availability.

My estimate from their last published numbers would be it is more like 45%, assuming you're talking gross margin. That's after stripping out the iTunes revenue which has tiny margins, maybe 3% tops.

Anyway this whole debate is so ludicrous, Apple is an american public company. It has a fiduciary duty to its shareholders to make money, so if it thinks it can get lower prices out of its suppliers without screwing up its long term relationships - it will, and it should.
post #40 of 70
Apple needs to maintain certain profit margin or better. Otherwise Apple stock will tank. Apple also needs to bring better products to market without raising the price. How do you think Apple can do to satisfy these two conditions?
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