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Apple's aura of innovation obscured by clouds

SILICON VALLEY/OSAKA -- As he opened Apple's Worldwide Developers Conference on June 13 in San Francisco, Tim Cook, the CEO of the tech giant, crowed about the huge benefits the App Store has brought to both consumers and application developers.

"The App Store started eight years ago with only 500 apps," Cook said in his keynote speech in front of 5,000 attendees. "Recently we passed a major milestone. We now have 2 million apps there."

These products have provided consumers with reams of entertainment and convenience, and at the same time, amply rewarded developers. "We're about to pass $50 billion paid directly to developers," Cook said.

Apple has changed people's habits in many ways, from the way we work, shop, communicate and listen to music to a host of other novel ideas. The company's enormously popular products have also generated handsome profits for electronics parts makers and software developers around the globe, benefiting the world economy.

But without any hit products that dazzle consumers in recent years, the company's aura of innovation has started to dim. 

Engine trouble

The June 13 conference offered clear signs of Apple's struggle to maintain its technological leadership and creative forces.

Nothing big was announced at the event. Attendees heard about only minor improvements to existing platforms, and many felt Apple was talking more about its past than its future. 

To be fair, Cook, who became Apple's chief executive just before Steve Jobs died in 2011, has done a good job managing the company. Under his watch, Apple's sales have grown by half and its stock doubled. Cook revitalized demand for the iPhone by introducing larger-display models, an idea Jobs once shot down. He also supervised the launch of the Apple Watch.

Even if he does not have Jobs' magic touch, Cook deserves credit for keeping Apple's earnings on a steady upward trajectory.

Now, however, Apple's innovation machine appears to be in danger of falling into disrepair.

In mid-January, a Japanese supplier received a shocking request from Apple. In a video conference between the supplier's head office and Apple's headquarters in Silicon Valley, an Apple executive told the electronics parts maker to immediately stop the expansion of production capacity Apple had requested last summer. The executive asked the Japanese company to make an estimate of the cost of canceling the expansion plan as soon as possible.

This coincided with Apple starting to reduce production of the iPhone 6s that month. Output has declined by as much as 30% from the previous year. 

The iPhone 6s is not significantly different from its predecessor, the iPhone 6, in either appearance or features. Without any major changes, consumers have not felt compelled to upgrade handsets. 

In the initial years of the iPhone, first launched in 2007, the production volume was fairly small, which allowed Apple to make generous use of cutting-edge parts from all over the world. But now, more than 100 million of the latest models are made, posing a formidable challenge in securing the necessary parts. 

As the iPhone has grown into a gargantuan business involving a legion of quality control managers, Apple has become more conservative about adopting new technologies.

Meanwhile, the iPhone has lost the ability to wow consumers the way its early models did. The market is now awash with smartphones similar in look and feel to it. If the company remains focused on competition in the smartphone market, where the handsets have become ubiquitous and trite, its status as an innovative leader will gradually erode. 

After a highly successful period of rolling out products that were changing peoples' lifestyles, Apple is experiencing a dry spell. Is the tech giant trapped in the cycle of prosperity and decline, as is the way of the world?

Reverberations

The answer has huge implications for Nidec, a leading manufacturer of motors and optical drives. In a press conference announcing the company's latest earnings held in April, Shigenobu Nagamori, the company's founder and CEO, lamented that orders from Apple for the company's cutting-edge components had fallen much sharper than he had expected. The reductions have trimmed Nidec's bottom line. 

Most Apple suppliers had suspected Apple was having some trouble, but the reality has proven far worse than they thought. 

The iPhone SE, a smaller and lower-priced model launched at the end of March, was seen by parts makers as another sign of Apple's travails. It apparently was created as a model to use up part inventories and thereby limit damaged caused by production cuts. The cheaper handset has been taken by many as further evidence that Apple is on the defensive. 

Cook, of course, would reject the gloomy narrative about his company.

In an interview on CNBC May, Cook said there is "great innovation" in the pipeline for future iPhones that will prod customers into upgrading. "We are going to give you things that you can't live without that you just don't know you need today," he said.

But the production plans for the next iPhone that Apple has revealed to suppliers show no increase in output. Apple's growth strategy has clearly hit a wall. 

In the short term, Apple is betting on organic light-emitting diode, or OLED, display technology, which allows for more flexible designs. The company has been in negotiations with Samsung Electronics since spring over OLED panel supplies.

Apple proposed that Samsung build an OLED panel production line exclusively for its products, and even offered to finance construction of the line. But Samsung, which dominates the global OLED display market, declined the request, showing that Apple's waning clout is also changing its relations with suppliers. 

Cook is keenly aware of the importance of being continuously innovative. "Our North Star has always been about improving people's lives by creating great products that change the world," Cook said at the June 13 conference.

For Apple, however, maintaining the ethos of innovation on which its current success has been built is becoming an increasingly difficult challenge.

(Nikkei)

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