12 Mar 2013

The Curious Case of the iPad Shipment "Collapse"

iPad vs. Other Tablets - Historical Shipments

My last post on NPD's display shipment estimate seems to have kicked up quite a storm. Some didn't seem to buy the production cuts argument as a rationale for a drop in sales. The goal of this post is to show that the potential collapse in 9.7" iPad sales is not just realistic, it should be expected.

The Production-Sales Relationship

Apple's supply chain is typically a well-oiled machine. The company's supply chain practices are geared towards minimizing working capital requirements and therefore, attempt to avoid any channel stuffing issues. However, the only possible cause of sudden drop in display shipments (even for a month) is an inventory build-up at some point in the supply chain. Let's take a look at the possible reasons for this inventory build-up:

1) Rising Yield Rates - Yield rates have not been an issue for the 9.7 inch iPad or its displays, so it seems to be an unlikely cause of the drop in production. If this crash was related to the iPad Mini, we would probably need to look at this more closely.
2) Change in the iPad's Screen Size - There's very little reason to do so (fragmentation concerns, etc.), and even if such a move was being considered, there would have been numerous supply chain leaks about the change.
3) Change in Display Manufacturers - There have been many reports of production cuts of the iPad's display, but NPD's data is different because of one crucial reason - Previous reports only gauged production cuts at a single or a few suppliers, while NPD's data tracks the industry as a whole. Therefore, we can eliminate this possibility.
4) Drop in Sell-Through - The only other possibility is a drop in sell-through rate of the 9.7" iPad. This would have resulted in inventory build-up in the channel, which would have necessitated a production cut. Since the drop in display shipments was sudden and not gradual, it implies that Apple had forecasted higher sales for the 9.7" iPad.

Signs of the Shipment Collapse from Q4

Now that we know that NPD's data clearly hints at a drop in sell-through rate. Let's take a look at the signs of this collapse in Apple's historical shipment data:

iPad vs. Other Tablets - QoQ Growth

Most iPad Mini shipments estimates, for Q4 2012, range between 7-10 million. Using a mean figure of 8.5 million, I've constructed the shipment chart above. As we can see, the iPad's QoQ growth pattern over the last two quarters really highlights the impact of the iPad Mini. Q3 sales were depressed as consumers held out for the iPad Mini, but strangely, the shipments of the 9.7" iPad didn't really recover in Q4 (from an already low base). This wasn't an industry-wide phenomenon as shipments of the iPad Mini and Android tablets remained strong. This is something I had predicted in my cannibalization estimate, although not to this degree.

As the chart shows, Q1 tablet shipments tend to be considerably weaker than Q4 shipments. Based on last year's figures, I expected the market to shrink significantly. NPD's data suggests that rising emerging market demand (which is relatively less cyclical) is beginning to make up for cyclicality in mature markets. The overall market will still decline, but possibly not as much as it did last year. Based on my previous Q1 iPad shipment estimate of 17 million, the iPad Mini is likely to make up 7-8 million units (for a 10-15% QoQ decline). This implies that 9.7" iPad shipments would drop below 10 million units - the lowest figure since Q2 2011, i.e. since the launch of the original iPad 2.

The primary issue is that the iPad Mini seems to be too expensive to take a large chunk of sales away from cheaper Android tablets, but is still a good value proposition to potential iPad buyers. This limits market expansion potential, while increasing cannibalization. The iPad's ASP in Q1 was a very strong hint of this dynamic and NPD's data suggests that the iPad's ASP in Q2 could be even lower.