Apple and Samsung Woes Shake Smartphone Suppliers

Smartphones are a mega product that have generated their own industrial renaissance.

But with market saturation and declining sales, there does not currently appear to be another product on the horizon capable of similar economic impact. And that ripple effect will create a global problem for profits and employment. JL

Louise Lucas reports in the Financial Times:

There are about 300 to 500 key components and subassemblies (in your phone). But pull apart the mini cluster-assemblies, and the number is 2,000. With sales of 1.5bn a year, smartphones are a monster market. But what’s the next big driver? 80m cars shipped a year would equate to two weeks of smartphone production.The numbers pan out miserably for the 2m virtual reality headsets expected to be sold; the 12m annual servers sold or even the 20m Apple watches
When the Apple tree is shaken, the effect is felt in the lower branches — the myriad companies supplying the hundreds of parts that go into a smartphone.
The tree has taken some shaking this year. Of the two companies that dominate the smartphone sector, Apple last quarter reported the first annual decline in iPhone sales volumes. Samsung has been burnt by the furore around the exploding Galaxy Note 7.
More broadly, Gartner, the consultancy, forecasts smartphone sales to rise just 7 per cent this year, half the rate of 2015, adding to worries that the vast industry formed about the production of smartphones will soon be starved of growth.
“With sales of 1.5bn a year, smartphones are a monster market,” says Steven Pelayo, tech analyst at HSBC, who points to the relatively smaller PC and tablet markets. “It’s been a supercycle that has cannibalised everything. But what’s the next big driver?”

That question is ricocheting around the boardrooms and factory floors across Japan, Taiwan, South Korea and China. Apple alone relies on more than 200 suppliers for its products, the vast majority based in Asia.
As chief executive of Japan Display, which generates 85 per cent of its revenues from smartphone makers and half from Apple, Mitsuru Homma knows the quandary only too well.
“If we stay with smartphones, then five to 10 years later JDI will probably no longer exist,” he says. “I feel very much the sense of crisis.”
Even the Japanese government, JDI’s main shareholder, is in agreement, he adds. The display maker is looking to diversify into supplying the devices linked to the internet of things and artificial intelligence.
Mr Homma sees opportunities in self-driving cars, which will require interactive screens and maybe entire smart dashboards as well as medical monitors where the highest resolution can be, literally, a matter of life or death, and virtual reality. Cars also feature in Sony’s plans, along with the internet of things. The Japanese consumer electronics group staked its fortunes on image sensors and now boasts a 40 per cent market share by value. “Image sensors are input devices, so we believe there are new markets out there,” says Tsutomu Haruta, general manager.
Sony’s advantages, according to Shoichi Kitayama, general manager, are that its sensors can see bikes and people in the dark and pictures remain sharp even in high temperatures. Come 2025, he says, the average car will have two or three image sensors. At the top end that will stretch to 10.
“The economies of scale will be comparable to smartphones and will come close in terms of wafers used,” he says.
But he concedes those markets are new and untested — and for now are going to be smaller than the smartphone bounty.
Quite substantially smaller on Mr Pelayo’s reckoning. The semiconductor content per car is forecast to double from $350 to $700 by 2020 — equivalent to adding more than two iPhones, with about $150 in chip content apiece, in the average car over the next four years, or roughly one-half of an iPhone every year.

With about 80m cars shipped a year, this would equate to about 40m more iPhones “or less than two weeks of smartphone production”.
The numbers pan out similarly miserably for other applications: the 2m virtual reality headsets expected to be sold this year; the 12m annual servers sold or even the 20m Apple watches.
Some are undeterred by the punier numbers, pointing out that smartphones are still in the picture for now, albeit growing slower and with an evolving modus operandi.
“You’ve got to look at what the smartphone brands are doing,” says Cherry Ma, tech analyst at CLSA. She spots two trends that will drive growth in certain areas: smartphone makers upgrading cameras, sound and aesthetics in an attempt to win share; and a consumer swing towards Chinese handset manufacturers.
This year will see as many as 20 handsets featuring dual cameras offering better image quality, up from just one device last year. While global handset sales have grown 1-2 per cent this year, Chinese brands combined are growing at 20 per cent, she says.
“Even though the smartphone market is getting saturated, there is growth in dual camera phones so there are more image sensors in each phone,” says Sony’s Mr Haruta. He adds that while the number of smartphone players has been winnowed down, the top players are focused on cameras. “Requests have changed, even among the Chinese smartphone manufacturers. They all want special cameras,” he says. “Even among the cheaper makers, they are also looking to expand into high-end and are at the stage where they want to add more value.”That trend, which has been detrimental to Apple’s sales in China in particular, is helping buoy some of the top suppliers: not just those with brand names such as Sony, but also the companies investing in research and development to gain market share in niche or proprietary hardware.Ms Ma points to Sunny Optical, which is ramping up quantity and quality of its camera modules; while the desire for better sound plays to AAC Technologies, the Hong Kong-listed Apple supplier that is beefing up capital expenditure.Higher resolution and sound quality, added to more complicated specifications, means higher average prices for suppliers as well as boosting quantity, says Ms Ma. “With acoustics, there is no one standard design. Vendors have to come up with their own design, so have to spend a lot on R&D,” she says.That — like the brave new world of self-driving cars and self-filling washing machines — may help but a gap remains. Tech analysts have identified a plateau in smartphone design outside more incremental updates in advanced imaging, which means that many people are now happy to keep hold of the smartphones already in their pockets for longer.At least until they are given a new, good reason to upgrade. Suppliers to the once-unstoppable smartphone makers will need to tighten their belts as they wait for the next wave of popular consumer innovation.“Over time, we suspect supply chain growth will be driven by an ever broader array of products, but no individual segment will probably catch the smartphone market any time soon,” says Mr Pelayo.Smartphone breakdowns reveal complexity of designs. Just how many parts are in your phone? There are about 300 to 500 key components and subassemblies. But break these down further, and pull apart the mini cluster-assemblies, and the number is closer to 2,000.More precisely, according to teardowns by IHS Markit, the consultancy, the Apple iPhone 7 has 1,815 components. That is a whisker below Google’s Pixel XL and a handful more than Huawei’s Honor 8, which has 1,729.Smartphones overtook PCs in semiconductor consumption in 2014; the gap between the two, says consultancy Gartner, will continue to widen. Qualcomm of the US and Taiwan’s MediaTek are the biggest suppliers of processors.Even the geekiest home engineer would struggle to put a smartphone together, says Amy Teng, research director at Gartner: there are so many connections it would be impossible to solder them all by hand. That need not be a problem. In Shenzhen, across the border from Hong Kong, you can buy circuit boards with chips already soldered on and then add on your own, separately purchased keypad, camera and the rest. And people do, flying in from emerging markets to stock up on parts to piece together back home.“This is why there are so many lower-tier phones,” says Ms Teng.

“Requests have changed, even among the Chinese smartphone manufacturers. They all want special cameras,” he says. “Even among the cheaper makers, they are also looking to expand into high-end and are at the stage where they want to add more value.”
That trend, which has been detrimental to Apple’s sales in China in particular, is helping buoy some of the top suppliers: not just those with brand names such as Sony, but also the companies investing in research and development to gain market share in niche or proprietary hardware.
Ms Ma points to Sunny Optical, which is ramping up quantity and quality of its camera modules; while the desire for better sound plays to AAC Technologies, the Hong Kong-listed Apple supplier that is beefing up capital expenditure.
Higher resolution and sound quality, added to more complicated specifications, means higher average prices for suppliers as well as boosting quantity, says Ms Ma. “With acoustics, there is no one standard design. Vendors have to come up with their own design, so have to spend a lot on R&D,” she says.
That — like the brave new world of self-driving cars and self-filling washing machines — may help but a gap remains. Tech analysts have identified a plateau in smartphone design outside more incremental updates in advanced imaging, which means that many people are now happy to keep hold of the smartphones already in their pockets for longer.
At least until they are given a new, good reason to upgrade. Suppliers to the once-unstoppable smartphone makers will need to tighten their belts as they wait for the next wave of popular consumer innovation.
“Over time, we suspect supply chain growth will be driven by an ever broader array of products, but no individual segment will probably catch the smartphone market any time soon,” says Mr Pelayo.

Smartphone breakdowns reveal complexity of designs

Just how many parts are in your phone? There are about 300 to 500 key components and subassemblies. But break these down further, and pull apart the mini cluster-assemblies, and the number is closer to 2,000.
More precisely, according to teardowns by IHS Markit, the consultancy, the Apple iPhone 7 has 1,815 components. That is a whisker below Google’s Pixel XL and a handful more than Huawei’s Honor 8, which has 1,729.
Smartphones overtook PCs in semiconductor consumption in 2014; the gap between the two, says consultancy Gartner, will continue to widen. Qualcomm of the US and Taiwan’s MediaTek are the biggest suppliers of processors.
Even the geekiest home engineer would struggle to put a smartphone together, says Amy Teng, research director at Gartner: there are so many connections it would be impossible to solder them all by hand.
That need not be a problem. In Shenzhen, across the border from Hong Kong, you can buy circuit boards with chips already soldered on and then add on your own, separately purchased keypad, camera and the rest. And people do, flying in from emerging markets to stock up on parts to piece together back home.
“This is why there are so many lower-tier phones,” says Ms Teng.