Apple’s (AAPL) Penny Pinching Ways Met with Strong Resistance

It’s just a matter of time before Apple Inc. (NASDAQ:AAPL) flagship smartphone, the iPhone 7, launches in September but with lukewarm reception, executives are scrambling to find ways to make decent earnings. According to reports, Apple’s is putting the pressure on its Taiwanese parts suppliers to lower the prices for the iPhone 7 components.

In an editorial published by DigiTimes, Apple is said to be “squeezing profits” from Taiwan suppliers by reducing their quotes for iPhone 7 parts by as much as 20% despite lowering orders by 30%. In return, major chain suppliers Advanced Semiconductor Engineering (ASE) and associated companies under the Foxconn Group refused to yield to Apple’s request, noting that the companies “could not be able to accept orders without reasonable profits at this time.”

According to a Foxconn rep, the company recently acquired Sharp, a Japanese consumer electronics firm. Orders from Sharp allows for a steady stream of revenues for Foxconn so there’s no need to sacrifice its margins to yield to Apple.

Taiwanese correspondent Cage Chao explained that Apple wants to keep the cost comparable with that of the parts prices offered by China-based suppliers. But since the quality of the iPhone 7 parts between the suppliers stand at different levels, the move was met with strong resistance by the Taiwanese.

In the commentary, the Taiwanese supply chain expressed frustration over Apple’s comparison with the Chinese supply chain to decrease prices, regarding it as a “betrayal for those that have worked with Apple year after year earning low margins.”

Incidentally, the demand for lower parts cost was not extended to Taiwan Semiconductor Manufacturing Company (TSMC) and Largan Precision. TSMC supplied Apple’s A10 chip while Largan supplies camera components for the iPhone line. And the only reason why Apple did not try to demand lower costs from these companies is because the iPhone maker couldn’t find better alternatives to get foundry services or high-end camera components from.

“ASE, which has reached a merger agreement with fellow company Siliconware Precision Industries (SPIL), has seen its business growing steadily in recent years optimizing its advanced packaging technology. The planned merger with SPIL will help ASE further expand its client base for sustainable growth,” Chao writes.

With the refusal of its Taiwanese supply chain to lower prices, Chao said it is high time for Apple to “amend its purchasing policy.”

According to data compiled by Canaccord Genuity, in terms of shipment volume, Apple accounts for 17.2% of the world’s smartphone market. However, the California-based smartphone manufacturer took as much as 91% of the industry’s profits last year. With the sales of iPhone down this year, Apple’s stock continues to struggle, particularly after second-quarter earnings results.

It’s interesting to see how the issue will affect pricing a few weeks before the launching of Apple’s newest iPhone. Developers only have a relatively short period of time to work on the beta iOS and we are quite certain that iPhone 7 will not ship out using an older OS.

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