It has been reported by the Japanese news agency, Nikkei, that Apple is reducing production of its iPhone SE model by 20% in the next quarter as a result of weaker demand. This will amount to 2-3 million fewer units being ordered from suppliers across Asia. Production volumes of AirPod headphones will also be reduced by 10 million units across the year as a whole.
It seems that the downturn is a result of a number of factors. The tech manufacturer has been hit by its decision to withdraw from the Russian market where it had a sizeable market share in both smartphones and PCs. Consumer confidence in Europe as a whole is also a consideration, as people make a choice between upgrading their smartphone and paying for increased costs of food and heating. On top of this, continuing Covid uncertainty is reducing growth forecasts, especially in China where the economy is expected to expand by just 5.5% in 2022 – a significantly low rate within the context of the recent past.
The supply and demand situation, and the way it is impacting on inventory levels and shipment volumes, is incredibly complex. In the past year, many sectors which rely heavily on semi-conductors, such as automotive, have been forced to reduce production despite underlying consumer demand. The war in Ukraine has only added to these problems as supply of one important element in the manufacturing process, Neon, has been disrupted. As such the world has been in the grip of a supply crisis, exacerbated by shipping and air cargo capacity constraints. This is indicated, in the US at least, by the low level of the US ‘inventories to sales ratio’, evident in the chart below. According to news organization, Market Watch, ‘The low readings show just how hard it is for businesses to produce enough goods to satisfy customers amid major shortages of labor and supplies.’
Source: St Louis Federal Reserve
Now, however, it seems that it is not only the supply side of the industry which is being affected and there is evidence that the government stimulated retail binge seen in the last quarter of 2021 is over. The US personal savings rate (the percentage of disposable income that people save), reached unparalleled heights during lockdowns, before falling back to more normal levels at the beginning of 2022. This suggests that, in the US at least, consumers have spent any surplus funds which they may have built up during ‘stay at home’ periods. This was (and still is) being reflected in the logjams experienced at US ports. As the chart below shows, the rate has returned to pre-Covid levels.
Source: St Louis Federal Reserve
One unwelcome scenario is that the pent up demand flagged by many manufacturers in 2021 may be at risk of evaporating. Uncertainty, combined with cost of living pressures caused by inflation and interest rate rises, may encourage consumers to delay or cancel purchases. Although it is early days, these decisions may be manifesting themselves in Apple’s forecasts and the consequent scaling back of production of its newest smartphone.
In terms of logistics, the second quarter of 2022 could well see the capacity crunch in the shipping industry unwind as consumer demand drops and the ability to supply existing orders is compromised by continuing lockdowns in China. This will necessarily impact on sea and air freight volumes and rates. Fuel price increases will also act to dampen prospects for the economy and derived demand in the transport sector.
Source: Foundation for Future Supply Chain, 29th March 2022
Author: John Manners-Bell