Tech: Apple’s troubles weigh on Malaysian semiconductor players

This article first appeared in The Edge Malaysia Weekly, on February 5, 2018 - February 11, 2018.

Apple is facing a probe in France and lawsuits in the US and Israel over its iPhone software update

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APPLE Inc, the world’s most valuable company, released a “bittersweet” set of financial results last Thursday, having sold fewer iPhones but made up for it with higher unit prices.

For its first quarter ended Dec 30, 2017 (1QFY2018), Apple sold 77.3 million iPhones, down 1% year on year, which was below analysts’ projection of 80.2 million units.

Fortunately, it was offset by the higher price of the iPhone X — the company’s most expensive smartphone to date — resulting in what was still a record-breaking quarter of US$88.3 billion (RM343 billion) in revenue and US$20.1 billion in net profit.

Partly in response to Apple’s mixed quarterly performance, Malaysian semiconductor and semiconductor-related stocks were sold down last Friday, after markets were closed on Wednesday and Thursday for the Thaipusam and Federal Territory Day holidays.

Outsourced assembly and test (OSAT) companies Unisem (M) Bhd, Globetronics Technology Bhd, Inari Amertron Bhd and Malaysian Pacific Industries Bhd (MPI) saw their share prices fall 3%, 3.5%, 3.9% and 10.5% respectively.

Automated test equipment manufacturers ViTrox Corp Bhd, Elsoft Research Bhd and Pentamaster Corp Bhd saw their share prices decline 3.3%, 0.7% and 1.9% respectively.

The share price of homegrown high-performance test contacting solution provider JF Technology Bhd also fell 2.9% to close at RM1 last Friday.

With the lower-than-expected iPhone sales, long-term investors are now concerned about plans to cut back on iPhone production.

It is worth noting that Apple is a significant buyer of semiconductors — it is an offtaker of about 10% of the global output. Hence, Apple’s cutback plans could have a negative impact on what was a booming chip market last year. For instance, suppliers such as Broadcom Ltd and Qualcomm Inc have pointed to larger-than-usual cuts at this time of the year from a single customer. Analysts suggested the customer was probably Apple.

It is interesting to note that pressure is piling up on Apple as the tech giant has been embroiled in “Batterygate”, with US authorities investigating whether its disclosures about a software update that slowed down older iPhones misled investors and violated securities laws.

While Apple insists that the update to the iOS operating system released late last year was designed to improve battery life and stop phones from shutting down unexpectedly, some users accused the company of deliberately degrading the performance of older phones to push customers into buying new handsets.

Apple has rolled out a battery replacement programme for the affected phones, offering lower prices for the new batteries for the affected iPhone models.

The iPhone maker is now facing a probe in France and lawsuits in the US and Israel over the software update.

When contacted, captains of industry acknowledge that local semiconductor firms will inevitably be affected by the troubles facing Apple.

ViTrox senior vice-president Steven Siaw Kok Tong tells The Edge that semiconductor players that are heavily dependent on Apple or its direct supply chain for a major bulk of their business will likely feel the impact, but less so for those who have a diversified customer base.

He believes that if the investors’ investment time horizon is between one and three years, they may want to consider taking profit on semiconductor stocks. “Otherwise, just keep adding to your portfolio to average down when there is a price correction.”

JF Technology managing director and CEO Datuk Foong Wei Kuong is of the view that the lower-than-expected iPhone sales are partly due to problems with the phone batteries. “This will affect players that are directly or indirectly exposed to the smartphone segment of the semiconductor industry. Those that are exposed to, say, the automotive or Internet of Things (IoT) segment will likely be less affected.”

He says investors should not be too worried and should stay invested because one company’s loss and is another’s gain.

“Moreover, our OSAT players are exposed to not just the smartphone segment. There are also the automotive and IoT segments, which have good outlooks,” he remarks.

According to a Nikkei report, Apple will slow production of its flagship iPhone — the US$999 iPhone X — by 50% in the first three months of this year because of a lack of demand.

Nikkei also reported that there are indicators of lower-than-expected sales of the iPhone X during the holiday season in Europe, the US and China, and customers are opting to keep their mobile phones for a longer time.

Samsung Electronics, which exclusively supplies organic OLED panels for the iPhone X, has announced weaker-than-expected results in its display business from October to December 2017, hit by poor iPhone sales by Apple.


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