Behind Apple's supply issues and what's causing them

Published Thu, Oct 28 20218:24 PM EDT

Apple reported 29% sales growth in its September quarter on Thursday. But the stock dropped after the company revealed that it could have had $6 billion more in sales except for supply chain issues. Next quarter, Apple warned, the supply issues will be even worse — meaning an even bigger hit than $6 billion to Apple's revenue. Even Apple, which can pay huge sums to lock down supply, and is run by a renowned supply chain expert, is facing challenges getting enough parts to meet demand. But the nature of the shortfall is worth noting for investors in Apple, semiconductor stocks, and the electronics supply chain: It's not the powerful, pricey chips at the heart of its devices, but all the other circuits and semiconductors that make the whole product work. In calls with analysts and CNBC on Thursday, Apple CEO Tim Cook explained that the issue Apple was facing was twofold. First, factories in Southeast Asia had production delayed or disrupted due to Covid lockdowns and restrictions, Cook said. These have become less severe in October, Cook said. "I feel like we've made great progress on the COVID related disruptions. And that happened across the month of October and we're in a materially better position today," Cook said. But the bigger problem going forward is the fact that Apple can't get enough chips to build its iPhones, iPads, and Macs. Cook said that the issue Apple is facing isn't with "leading edge node" chips, but with so called "legacy node" chips. "For this quarter, we think that the primary cause of supply chain related shortages will be the chip shortage. It is affecting, I should say, pretty much most of our products currently," he continued. The most powerful chip inside a phone, tablet, or laptop is called the central processor, or CPU. These days, the CPU is often part of a system-on-a-chip, or SoC, that also integrates other functions, like decoding video, processing artificial intelligence, or providing security functions. "Primarily, we buy bleeding edge nodes and we're not having issues of bleeding edge nodes. But on legacy nodes, we compete with many different companies for supply," Cook said. For processors, it makes sense to use the most advanced manufacturing possible — "leading edge node" —which creates chips with the smallest transistors. The more densely transistors are crammed into a semiconductor, the more power efficient it can be, and the more technologically advanced the chip is. Apple's SoCs are called M1 for its laptops and tablets, and A15 for its iPhone, and they are manufactured by TSMC. These are the chips that Apple has plenty of. The chips that are in shorter supply are manufactured on "legacy nodes," using production methods that were developed years ago. These chips aren't as powerful at computation, and sometimes they use more power, but they're essential for putting together a full computer or smartphone. These "legacy node chips" handle functions like power management, or connecting to a display, or acting as antennas for wireless connections. And it's the legacy node capacity that's being strained as automotive companies and other manufacturers vie for limited supply. Apple officials did not specify the exact parts it didn't have enough of on Thursday. But Apple has been struggling with shortages in display parts from Texas Instruments, and wireless components from Broadcom, according to a Bloomberg report earlier this month . Apple declined to comment and Broadcom and Texas Instruments didn't respond to requests for comment. "We squeeze our cycle times to be as fast as possible. And so we want there to be as little time as possible between a chip coming off of a fab and making a product and getting it to the customer," Cook said. Cook's remarks on Thursday are similar to comments from semiconductor CEOs in the past weeks. Both AMD CEO Lisa Su and Intel CEO Pat Gelsinger call the issue a "match set" problem. "We call it match sets, where we may have the CPU, but you don't have the LCD, or you don't have the Wi-Fi. Data centers are particularly struggling with some of the power chips and some of the networking or ethernet chips," Gelsinger previously said in an interview with CNBC . The question becomes when supply for these legacy node chips will catch up with the demand from computer makers like Apple. Intel thinks it might not be until 2023. GlobalFoundries , an independent foundry which specializes in manufacturing legacy node chips, also thinks that the demand will outstrip supply through at least next year, and expects elevated demand for the next 10 years, its CEO Tom Caulfield said in an interview on Thursday. Cook didn't offer a prediction on Thursday and said it would depend on the global economy. "I wouldn't want to predict it. It's it's unclear how long it will last because it's it's complex," Cook said. "You have to know how the economy is going to be in 2022. You'd have to know everybody else's demand because we're all competing for chips on these legacy nodes."

Apple reported 29% sales growth in its September quarter on Thursday. But the stock dropped after the company revealed that it could have had $6 billion more in sales except for supply chain issues.