5 Reasons Apple Might Be Slowing iPad Production

Last Updated Sep 26, 2011 1:37 PM EDT

Apple has cut iPad orders with its vendors by 25 percent, according to JP Morgan Chase, as Bloomberg reports. DigiTimes also mentions a global slowdown for iPads. It's set off a rush of speculation as to why -- assuming the news is even correct -- which ranges from the sky-is-falling variety to pay-no-attention-to-the-haters.

Given Apple's secrecy, there is virtually no way to know for sure. The company's vendors are locked down with some of the most draconian and punitive non-disclosure agreements in the industry. However, what Apple does is automatically important to the high tech industry, so let's look at the leading hypotheses.

The story so far
A 25 percent cut at several iPad supply chain vendors over the last two weeks is enough to shake people who depend on the Apple sales machine:
For a vendor such as Hon Hai, the cut could mean a drop to 13 million units in the fourth quarter from 17 million units in the third quarter, JPMorgan analysts wrote in the Sept. 25 report. The report said JPMorgan U.S. analyst Mark Moskowitz, who covers Apple, does not expect to lower his projection of 10.9 million to 12 million units of iPad shipments in the third and fourth quarters after the supply chain adjustments.
Even if Apple turns down the demand at the manufacturing side, JPMorgan has kept its fourth quarter estimates for sales. So what's going on? Here are some guesses.

Europe's not keen on the iPad
According to RBS Asia analyst Wanli Wang, iPad demand in Europe is weakening. One reason could be the worsening economic crisis in the EU. Consumers might be holding on to their money out of fear. (It actually wouldn't be surprising to see demand in the U.S. slow some because of economic worries.)

Another suggestion is that the iPad simply isn't taking off in Europe. And yet, research firm Context estimated that, in western Europe, the 64 GB 3G iPad 2 accounted for a third of all iPad 2 sales since launch, and that's the most expensive model. Maybe a production change would be related to adjusting the mix of product. Then again, more expensive models could also cause hesitation even more quickly because of the economy.

Apple built what it needed last quarter
Susquehanna has a different explanation: Apple already built what it needed:
Our recently published AAPL supply-chain checks noted a sequential decline in 4Q iPad builds from 17 mln-19 mln units in 3Q to 11 mln-13 mln units in 4Q. However, the 4Q sequential decline was accompanied by an increase in 3Q builds, leading us to conclude that production was likely pulled-in from 4Q to 3Q. We believe AAPL has attempted to accelerate production in 3Q to ensure product availability for the holidays.
Maybe it's part of a master plan, but if you build units early, you have to store inventory that isn't doing you any good at the moment. It's not the most efficient way to operate if you build too far in advance.

Getting ready for the iPad 3
Another reason Susquehanna gave was that with the iPad 3 expected sometime in 2012, Apple might ramp down production of the iPad 2 models. The idea would be to limit older stock needing clearance and make room for the new version.

However, there's still the holiday season coming up. Unless there's plenty of stock in warehouses, slowing production would suggest that Apple expected sales to cool at a time when you'd normally expect purchases to increase. Also, some analysts said that they didn't think it was to prepare for a new model.

Competitors are finally taking hold
This seems like one of the least credible notions. The iPad still holds massive market share. None of the Android tablets have really seemed to catch fire; RIM shipped only 200,000 PlayBooks last quarter, which was down from 500,000 the quarter before; and HP (HPQ) killed off its TouchPad and had a big fire sale to clear out stock.

Then again, with rumors of Amazon (AMZN) announcing a tablet on Wednesday, Apple might plan for a potential loss of market share, as the new device would likely be significantly cheaper than an iPad.

Maybe Foxconn will build in Brazil
This is one interesting twist. A number of publications have noted that Foxconn had planned to start building iPads in Brazil in September. The timing would be right, and shifting a significant amount of production to South America would diversify manufacturing. That keeps a single disaster from stopping global production and also probably saves money and time in shipping.

On the flip side, the original report mention multiple supply chain vendors. Foxconn/Hon Hai does the final assembly, which would suggest that any others are building subassemblies or even parts. A Foxconn shift to Brazil doesn't explain why others would also see cuts in production runs.

My guess would be managing availability. Apple got hit earlier this year when it couldn't produce enough units to satisfy everyone. Increasing production last quarter would give some flexibility. Then Apple could go back to its regular schedule, knowing that it wouldn't lose any sales opportunities during the holidays.

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