Stress-Testing the Smartphone Supply Chain

Millions of workers at hundreds of companies in dozens of countries will have a hand in making the world’s 1.5 billion mobile devices this year alone. The global smartphone supply chain is vast, and integral to the economies of many countries. But the waning of the smartphone boom and the scaling back of globalisation pose threats. While the supply chain overall is in reasonably good financial health, negative impacts on its weaker links could reverberate across this intricate web.

Globalisation transformed the consumer electronics sector, beginning in earnest in the 1990s, when Cisco and Dell began outsourcing their manufacturing to a network of plants, primarily in Asia. In 1998 Apple hired Tim Cook, then a supply chain expert, who built what has since become a massive global network of contract manufacturers and suppliers. Today the four other major smartphone companies, Samsung, Huawei, and particularly Xiaomi and OPPO, also outsource production.

A recent study from the IMF showed that smartphone supplier networks have a major economic footprint. In October 2017, when the sector peaked, smartphone components accounted for more than 33% of Taiwan’s exports, 17% of those from Malaysia and 16% from Singapore. Components such as memory chips, system chips and displays pour from these and other Southeast Asian countries, such as South Korea, Vietnam, Japan and others, and are assembled mostly in China.

The production volume of the firms involved is staggering. But there is a potentially serious issue on the horizon: As China reaches saturation and Westerners upgrade less often, sales of new smartphones are starting to decline, signalling the end of the boom. Last year sales fell by 0.3%; however, revenues increased by 10% for all suppliers of hardware and services to smartphone companies. This is because newer phones have more sophisticated components. Data from IHS Markit show that the value of the parts inside an iPhone X and Samsung Galaxy S9, for example, is 28% and 13% more, respectively, than in their previous models.

“The system’s chief weakness is its long tail of puny firms,” according to The Economist. Many firms within the smartphone supply chain are troubled. A look into the finances of 42 big Apple suppliers, using data from Bloomberg, IHS and Morgan Stanley, reveals a yawning disparity in profits between Apple and its chip suppliers on one end, and firms that handle more basic activities on the other. Apple and 13 of its chip suppliers earn over 90% of the total profits. This leaves numerous other firms, such as assemblers, with a return on equity of 9% and a net profit margin of a just 2% in aggregate. Such firms are much more vulnerable to volatility and international trade tensions.

Tampering with complex systems such as these is a high-risk gambit. A blow to weak firms within the smartphone supply chain would have repercussions for consumers, millions of workers in Asia, and ultimately stock markets in America and East Asia. If governments act with restraint, they will likely still push for bigger shares of the profits, jobs and IP. The Economist warns, “If you are running a big firm in the smartphone complex, you should be reimagining things in preparation for a less open world,” adding the prediction of an industry made smaller through forced consolidation and automation. “Firms will need to adapt – or be swiped away.”