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Business

Apple suppliers face risk as iPhone sales continue to slow

TOKYO -- Many electronic parts makers and investors are bracing for knock-on effects from a possible continued slowdown in sales of U.S. technology giant Apple's iPhones.

     The popularity of iPhones has been good for an increasing number of businesses across the globe, while investors who buy shares in Apple's suppliers have become diverse.

     But the so-called Apple risk is now casting a shadow over such suppliers' earnings for fiscal 2016.

     Taiwan-based Hon Hai Precision Industry, also known as Foxconn, achieved rapid growth, thanks to its production of iPhones. In January, however, sales at the world's largest contract manufacturer of electronics fell 14.7% on the year, marking the second straight month of year-on-year decrease. This trend indicates a slowdown in demand from Apple. The monthly data was released on Feb. 5, when Hon Hai Chairman Terry Gou visited Osaka for bailout talks with Osaka-based ailing electronics maker Sharp.

     One Tokyo-based investor, as he awaited the results, said he intended to adopt a wait-and-see approach for Apple-related stocks.

     The situation could result in excess inventories of iPhones and further production cuts, said SMBC Nikko Securities' Hiroharu Watanabe, who visited companies in Taiwan in mid-February. The Japanese brokerage expects iPhone demand to slide 18% on the year to 190 million units in 2016.

     Apple's iPhones have always made a big splash every time the company released a new model lineup. Recently, however, the popularity has depended on the specific model.

     At the end of last year, Apple notified its suppliers of adjustments in output. After the beginning of the year, news reports said the American tech giant was likely planning a 30% cut in iPhone production during the January-March period, resulting in shares in Apple-related companies coming under selling pressure.

     Apple's 2015 list of its top 200 suppliers includes a little over 40 Japanese companies.

Harsh reality

Slowing iPhone demand is exposing the suppliers to a harsh reality.

     Take, for example, Japanese connector maker Japan Aviation Electronics Industry. The three-month average of value of orders the company received dropped 30% on the year as of January. An official at the manufacturer said it is difficult for it to streamline its operations to match declines in orders, as it expects orders to rise again eventually.

     Another potential victim is Sony and its operations making image sensors, for which the company holds the world's largest market share. Last November, sales of smartphone sensors slowed abruptly, although they had until then been a profit center for the company. Sony is likely providing Apple with components specially designed for iPhone models.

     According to Kenichiro Yoshida, Sony's chief financial officer and executive deputy president, the components are unlikely to support other companies' devices, and therefore, if demand decreases, the impact will be greater than with other products. Sony stocks have lost 12% of their value this year, due to concerns over the company's slower growth in the next fiscal year, starting April.

     Another manufacturer on the list, Alps Electric, cut its earnings forecast in January for the year ending this month, due to reduced orders from "some leading customers." As the Apple risk has surfaced, investors began pulling their money out of stocks of Nitto Denko and other electronic parts makers.

     The Apple supplier list also includes Japan's second-largest chemical maker, Sumitomo Chemical, and Daikin Industries, a giant in commercial air conditioning. They do not focus on the smartphone business, but share the same market pressures as Apple-related stocks.

     Some time ago, Apple CEO Tim Cook warned that the supply chain is very complex and it would be impossible to gauge what it meant for the company's business. In other words, Apple's orders to suppliers may rapidly increase, depending on future sales of new iPhone models, which are supposed to hit the market this autumn.

     So the question is, when will Apple watchers see signs of improvement. A fund manager at a Singapore-based hedge fund said that winners and losers this year will be determined by when they buy Apple-related stocks.

(Nikkei)

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