Apple Shipment Shortfall Prompts Cut in 2011 iPad Shipment Forecast

Manufacturing issues at Apple Inc. led to a shortfall in iPad 2 shipments in the first quarter, prompting IHS iSuppli to reduce its forecast for 2011. IHS iSuppli now forecasts Apple will ship 39.7 million units for all models of the iPad this year, down from the February forecast of 43.7 million. This represents a reduction of 9.1 percent, or 4 million units. Based on IHS iSuppli’s final estimate of 15.1 million units shipped in 2010, IHS iSuppli now predicts total iPad shipments will rise 163.3 percent in 2011, down from the 189.6 percent predicted in February. IHS iSuppli has slightly increased its 2012 forecast for iPad shipments to 62.6 million units, up from the previous forecast of 61.6 million.

Apple’s first-quarter supply of the iPad 2 fell far short of demand. IHS iSuppli sources indicate that Apple’s production was stymied by manufacturing difficulties, which—combined with strong demand—led to short supplies of the popular tablet. Those issues, according to the sources, included quality concerns with liquid crystal display (LCD) panels, production shortages of the new speaker, lamination issues with one of the touch suppliers and end-unit production shortfalls. While Apple is now on track to significantly increase its production volume in the second quarter, the company reportedly is still falling substantially short of its target production goal for April.

Apple’s first-quarter manufacturing challenges are unrelated to the Japan earthquake and tsunami. Apple appears to have moved more aggressively than most of its competitors to mitigate any potential supply chain disruptions from the Japan disaster. As with many electronics manufacturers, Apple extensively sources components from Japan. For example, there are several devices found in the iPad 2 that are manufactured in Japan that could have encountered supply problems following the earthquake and tsunami. However, Apple was quick to react to the potential supply fallout from the Sendai quake. Within days of the disaster, Apple had executives on the ground in Asia ensuring that its component supply chain would support iPad 2 shipment plans in 2011.

Apple reportedly has agreed to higher pricing, where necessary, to secure needed components. Apple’s fast action to lock up much of the available capacity of the leading component suppliers has left many competitors scrambling for needed components, particularly touch screens. Despite these precautions, quake-related supply constraints could still work to limit Apple’s ability to ramp up production in the second half of 2011 to the levels necessary in order to offset the first-quarter shortfall. The potential for second-half supply constraints contributed to the decline in IHS iSuppli’s 2011 iPad forecast.

Mirroring the first month of the initial iPad’s introduction, demand for the iPad 2 has outstripped supply, with the initial release limited to the North American market. Demand was also heavy for the freshly discounted first-generation iPads while supply remained. However, much of Apple’s iPad 1 manufacturing activity is not reflected in the company’s second-quarter shipment numbers—which occurred in the calendar first quarter—given that a substantial portion of those units shipped into the channel in December 2010.

Apple is expected to retain its short-term dominance in the tablet market because of the iPad’s advantages in the areas of content, marketing, supply, pricing and momentum, based on the iPad being the first product to enter the market. The iPad continues to set the standard by which other tablets are measured. Android-based tablet sales are slowly gaining momentum, but products released in the first quarter of 2011 continue to fall short of reviewers’ expectations.

“Content represents Apple’s most significant competitive advantage in the tablet market,” Alexander said. “Application development is accelerating for the Android market but still lags far behind Apple. Furthermore, the kind of seamless access to movies, music and other content that Apple can provide is still not in place for the competition.”

In terms of marketing, Apple also has a leg up on the competition, particularly when it comes to garnering support from third-party software vendors. To date, application developers have focused on advertising that promotes their wares are “available on the iPad” rather than “available on your tablet.” This will change as the tablet universe expands to include more vendors and operating systems, but it gives Apple an advantage right now.

Apple’s supply chain management represents a critical advantage in 2011, placing the company at the front of the line when it comes to procurement of components, frustrating competitors’ efforts to build and meet product demand.

Pricing is another area where Apple has a temporary edge over the competition. “Given its reputation as a seller of premium products, pricing is the last category where Apple should be expected to have an advantage,” Alexander said. “However, Apple’s move to discount the first-generation iPad when the iPad 2 was introduced frustrated competitors’ efforts to build sales volume while retaining a profit margin.”

Finally, Apple continues to benefit from its first-mover advantage in the tablet market. “Apple is still riding the momentum of having beaten everyone else out of the starting gate on this product. Its introduction of the iPad 2 coincided with many other vendors’ initial product releases and stole much of their marketing momentum. Apple will continue to have this advantage, to a lesser extent, in the future as many competitors are still playing catch-up to the company’s previous introductions.”

Despite the difficulties with many early Android releases, the sheer volume of models is starting to make an impact on the tablet market, particularly in Asia, where the lower price point on some regional brands works to offset performance or content concerns. Panel suppliers report strong demand from Chinese manufacturers for twisted nematic (TN) panels used in tablets. While most of the brands are still focused on developing products with in-plane switching (IPS) panels, IHS iSuppli believes there is a substantial TN opportunity in the tablet space, provided the other tablet elements are there.

Regardless of Apple’s short-term advantages, tablet competition is mounting and Apple’s market share will decline during the next five years.

IHS iSuppli forecasts Apple will lose its majority position in late 2012 or early 2013, although its earlier momentum is likely to leave it with more than 50 percent share of the total 2012 market. The early fumbles notwithstanding, Apple’s tablet competitors are constantly improving, leapfrogging over each other in the race to get the right price/performance combination. As that price/performance weighting differs significantly by customer and region, single-brand dominance does not tend to last in the electronics market.

Just the same, Apple’s lead is safe for now. “While Apple may lose its dominant share, there is no sign yet of a serious opponent to challenge Apple’s place as the tablet market leader at least through 2015,” Alexander said.

In 2013, shipments of other media tablets will rise to 111.1 million units, compared to only 81.3 million iPads, as shown in the attached figure. IHS iSuppli predicts iPad shipments will rise to 97.9 million units in 2015, compared to 164.2 million for other media tablets.

IHS iSuppli

Apple