Is Apple's Obsession Becoming a Liability?

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Apple (NAS: AAPL) is obsessed. There. I said it.

The company seems intent to push envelopes as far as it possibly can, even to the point of bordering lunacy. If you've watched Apple's marketing video on the iPhone 5, Jony Ive describes just how obsessive the manufacturing process is and how variances are measured in microns. That's just one example.


In recent years, Apple has increasingly run into supply shortages of its products from time to time, having trouble keeping up with overwhelming demand. This storyline has increased in frequency in recent times -- often relating back to component constraints of ingredients that are rather hard to come by but Apple is intent on using.

Is Apple's obsession becoming a liability?

If you build it, they will buy
The new iMacs that were just unveiled uses a new manufacturing process where the display is fully laminated, eliminating the gap between the LCD and the glass to improve display quality. Apple claims the process has never been applied on displays this large, so it's effectively wading into uncharted waters.

Source: Apple.

In August , KGI Securities analyst Ming-Chi Kuo, who has been absolutely nailing it with iPredictions this year, said the full-lamination process on the 27-inch models was particularly challenging and that yields remained low. Kuo figured the 27-inch model would, as a result, launch six to eight weeks after the 21.5-inch model, since the smaller desktops were less affected.

It turns out that exactly how it's panning out, with the 27-inch models shipping in December after the 21.5-inch models start in November. In fact, consumers can't even buy an iMac directly through Apple right now online even if they wanted to and were willing to settle for the older model, so the company could potentially be missing out on some sales.

The silver lining here is that desktops aren't too important to overall results, at just 3.5% of revenue last quarter, so this can't really hurt Apple too much.

But this can
The iPhone 5, on the other hand, absolutely can hurt Apple a lot if supply constraints prove brutal. That product family was 48% of sales last quarter, so investors will definitely feel it if sales fall short. The display is likely a culprit again here. This time, we're talking about in-cell touch display technology, which eliminates the need for a separate layer of sensors since the functionality is integrated directly into the display.

Source: Apple.

Again, this cutting-edge technology is prone to low yields in the early days, even though Apple is tapping Sharp, Japan Display, and LG Display (NYS: LPL) as suppliers. On top of that, Apple has reportedly stepped up quality standards with the aluminum chassis, making it difficult for its contract manufacturers to produce sufficient quantities.

We're now a third of the way through the fourth quarter, and the iPhone 5 is still constrained. New orders placed through Apple's site are still being quoted shipping times from three to four weeks.

Don't forget the little guy
NPD DisplaySearch thinks the new iPad Mini will also be hard to come by initially as production ramps up, with the most likely culprit being display yields. LG Display and AU Optronics (NYS: AUO) are the two primary display suppliers. AU Optronics is a relatively new supplier and has faced some hurdles ramping up to the volumes that Apple demands.

White iPad Mini pre-orders quickly sold out just 20  minutes after they began, despite skepticism that the devices was priced too high relative to 7-inch rivals such as Amazon.com's (NAS: AMZN) Kindle Fire HD or Google's (NAS: GOOG) Nexus 7, both of which start at $199.

Not you again
Over the summer, the 15-inch MacBook Pro with Retina display also faced shortages immediately following its launch, again related to low yields associated with -- you guessed it -- display production. It wasn't until August that Apple was able to reach supply and-demand balance with these units. The 13-inch MacBook Pro with Retina display that was just launched was released several months after its bigger brother because of low yields again.

Fortunately, these units are in stock and don't appear to be facing shortages. Laptops were 15% of sales last quarter, more meaningful than desktops.

Get my drift?
In case you haven't picked it up by now, Apple's obsession with the best displays that use state-of-the-art manufacturing processes has become a risk in itself, if that results in supply constraints and unmet demand.

Don't just take my word for it. Apple lists it is a risk factor in its filings:

Because the Company currently obtains components from single or limited sources, the Company is subject to significant supply and pricing risks. Many components that are available from multiple sources are at times subject to industrywide shortages and significant commodity pricing fluctuations.

It continues:

The Company's new products often utilize custom components available from only one source. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers' yields have matured or manufacturing capacity has increased. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to concentrate on the production of common components instead of components customized to meet the Company's requirements. The supply of components for a new or existing product could be delayed or constrained, or a key manufacturing vendor could delay shipments of completed products to the Company.

Source: 10-Q.

That's the bad news. The good news is that Apple carries unparalleled weight in the component market and does its best to lock down components with hefty prepayments, and Tim Cook is a supply chain wizard.

Apple's obsession with the latest and greatest is certainly a risk factor that's coming to a head right now as several of its newest products face shortages. However, since those products are well ahead of the competition and consumers are willing to stand in massive lines or wait weeks to buy, I think the net result is an asset, not a liability.

The iPhone and iPad now comprise nearly three-quarters of revenue, making them by far the two most important product families to Apple's future success. That's exactly why I've put together comprehensive reports on both of these growth magnets, included as a bonus in our Apple premium research service. In them, you'll learn everything you need to know about the iPhone 5 and how to profit on it, as well as just how massive the global iPad opportunity will be in the years ahead. Get started by clicking here.

The article Is Apple's Obsession Becoming a Liability? originally appeared on Fool.com.

Evan Niu, CFA, owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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