Did Apple slash iPhone display orders due to improving yields?

Some analysts are arguing that Apple's iPhone component cuts may actually be a good thing.

There's been a whole lot of discussion surrounding the Wall Street Journal's initial story claiming that Apple cut its order of iPhone 5 components in half. Naturally, some were quick to claim the story was bogus, a transparent attempt to manipulate Apple's share price ahead of its earnings announcement.

Since the original story first hit the wire on Sunday evening, it has since been echoed by the New York Times, which, as opposed to the WSJ story, provided us with specific details surrounding the cuts.

Apple does appear to be cutting back on orders for its latest iPhone from its manufacturing partners, as Nikkei of Japan and The Wall Street Journal reported earlier. Paul Semenza, an analyst at NPD DisplaySearch, a research firm that follows the display market, said that for January, Apple had expected to order 19 million displays for the iPhone 5 but cut the order to 11 million to 14 million. Mr. Semenza said these numbers came from sources in the supply chain, the companies that make components for Apple products.

All that said, some are also pointing out that news regarding Apple scaling back its iPhone 5 component orders first surfaced back in early December and that this all old news.

Nevertheless, Wall St. is absolutely smashing Apple, with the stock dropping down to sub-$500 levels not seen since last February. And as one would expect, some analysts are now lowering their iPhone 5 sales estimates as well.

But not everyone is buying into the sky is falling mentality as it pertains to iPhone 5 sales.

One of the more interesting threads is that Apple's iPhone 5 display orders were scaled back because yields are improving. So says JP Morgan analyst Mark Moskowitz, who labeled the WSJ's article as "more noise" meant to spook investors.

"In our view, the potential order cuts are a direct result of manufacturing yields improving following the fast-and-furious product roll-outs of the iPhone 5 as well as new iPads and Macs," Moskowitz explained in a note to investors.

Indeed, if yields are improving and Apple is cutting back its component orders, its gross margins will be positively affected.

Furthermore, Sterne Agee analyst Shaw Wu - who has a typically hit or miss track record with respect to Apple rumors - issued a note to investors today saying that Apple's iPhone 5 demand remains robust, this according to suppliers.

TUAW notes:

Wu and several other Wall Street analysts believe that the rumored component order cuts have nothing to do with customer demand. Their take is that yields on the components have improved as suppliers gain experience, and Apple needs to place fewer orders to end up with the parts required to build the iPhones. He also stated that Apple shifting production between suppliers may have contributed to the appearance of cuts.

Either way, it seems clear that Apple, to some degree or another, did in fact lower its iPhone 5 display orders. The only question is why.

Is iPhone 5 demand waning? That's certainly possible, but somewhat curious considering how fast the iPhone came out of the gates earlier this fall.

So what about the notion that iPhone 5 display yields are improving?

Well, if we take a look back, yield concerns surrounding the iPhone 5 display have been an issue ever since the product first launched.

The iPhone 5 utilizes in-cell touchscreen displays which provide for a thinner screen as the touch sensors are embedded onto the LCD itself. The iPhone 5 was the first time Apple utilized in-cell touchscreen technology and manufacturing said screens quickly proved to be "painstaking" for Apple's partners. Of course, with any new technology comes some growing pains, especially when making something complex and thin even thinner.

In a research report from earlier this fall, Deutsche Securities analyst Yasuo Nakane explained:

The iPhone 5's 4-inch low-temperature polysilicon (LTPS) touch-panel display with in-panel switching (IPS) is exceptionally difficult to produce at high yields.

As for Apple's partners, Sharp in particular experienced a number of quality control issues in manufacturing the displays which kept yields unseasonably low. There were even reports that Apple was prepared to offer financial incentives to Sharp to "secure an acceleration of production."

In light of the initial hiccups involved in producing the iPhone 5 displays, is it possible that Apple overestimated its need for displays for the first quarter of 2013?

By early October, Sharp had reportedly gotten its initial manufacturing problems under control and were finally able to churn out displays at an "adequate volume," according to one Sharp executive.

Perhaps Apple then waited it out for two months to see if yields would remain at an acceptable level, and following that, decided to cut back its iPhone display orders. That's simply a theory, of course, but remember that the first reports surrounding iPhone display cuts emerged back in early December, not this past week.

And highlighting the serious nature of the low yields on the iPhone 5 display, you might recall that Apple reportedly bumped up trial production of the iPhone 5S precisely due to the low yields experienced when manufacturing the iPhone 5 displays.

And lastly, remember what Foxconn head Terry Gou had to say about the iPhone 5 - namely that it's the most difficult device they've ever had to assemble.

Another Foxconn official added back in mid-October:

To make it light and thin, the design is very complicated. It takes time to learn how to make this new device. Practice makes perfect. Our productivity has been improving day by day.

For all anyone knows, demand for the iPhone 5 has been trending downwards. But doesn't it seem strange that the iPhone 5 would be selling like hotcakes only to experience a sudden downturn in demand out of nowhere?

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Copyright © 2013 IDG Communications, Inc.

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