For Apple’s component supply chain, February is typically a sluggish month, but this past February was quite a bit worse than usual.

Sales data for a group of component suppliers that generate more than half of their revenue from Apple fell significantly during the month of February, says Topeka Capital Markets analyst Brian White, a foreboding sign for the iPhone maker. White says that his Apple Monitor, a metric that tracks key Apple suppliers, declined 31 percent sequentially over the month. That’s nearly four times the 8 percent dip it typically posts for the period. And even accounting for wildcards, like Chinese New Year, the numbers are bad.

“Since the timing of Chinese New Year can negatively impact sales in February, we also calculated the average February performance when excluding a January Chinese New Year, which equates to down 15 percent,” White explains. “Either way, the Apple Monitor came up short and delivered the worst February we have on record.”

Potentially ominous news for Apple — certainly a metric on which to keep an eye. That said, it’s also one that should be assessed while keeping a few important caveats in mind.

The first: This past February was lousy for the entire consumer electronics supply chain. White notes that every single one of his component monitors posted poor metrics for the month, with four of them turning in the worst or second-worst February on record. So Apple’s not the only company here with potentially concerning supply chain markers.

The second: As Apple CEO Tim Cook reminded us during the company’s first-quarter earnings call. “I would suggest it’s good to question the accuracy of any kind of rumor about build plans,” Cook said. “I would also stress that even if a particular data point were factual it would be impossible to accurately interpret what it meant for our overall business, because the supply chain is very complex and we obviously have multiple sources for things. Yields might vary. Supply performance can vary. … There’s a long list of things that would make any single data point not a great proxy for what’s really going on.”

In other words, a single peek at Apple’s supply chain is just that: A peek. And it may not be a good indicator of the overall picture.

In the midst of globally difficult economic times, the Japanese saw an opening. Taiichi Ohno, working for Toyota after World War II, saw inefficiencies in the American assembly line system, especially in the inventory and quality control systems. He pioneered a new system of production for the company, called “just-in-time.” The objectives were to introduce consistency in the production process and eliminate waste of all kinds, including overproduction, excess inventory, time (waiting for parts) and ineffective or defective products being produced. American supermarkets, ironically, held the answer for Ohno; they only restocked shelves with enough product to replace inventory that was sold to customers. In the just-in-time system, this translated into keeping about 24 hours’ worth of inventory in the factory, with parts being ordered and shipped on an as-needed basis.

The success of Toyota’s transformation is now well-known; it became a global company that would eventually surpass sales of GM, the world’s largest auto maker, in 2008. The just-in-time system pioneered by Toyota would be widely copied, with U.S. automakers implementing the new system in the 1980s, to varying levels of success.

Lessons for the Data Center

You may be asking what all of this fascinating automotive history has to do with data centers today, in 2013. The fact is, the data center industry is undergoing a transformation of its own. While the U.S., thankfully, hasn’t seen oil shocks on the scale of those experienced in the 1970s, it’s clear that the era of cheap energy is over, especially with increasing demand for energy supply in high-growth markets like China and India.

Rising energy prices and volatility mean that data centers can’t afford to operate the way that U.S. auto manufacturers did in the 1950s and 1960s. Traditionally built to accommodate future growth, wastefully inefficient data centers were built in previous decades with overcapacity in mind, in an era when energy was much cheaper and more readily available. Today, data center owners and managers face the challenges of legacy builds, with these facilities suffering from the same kind of waste that plagued the auto industry before lean manufacturing changed it. As James Glanz outlined last year in the New York Times story “Power, Pollution and the Internet,” the worst offenders not only use huge amounts of energy to power parts of data centers that aren’t used, but also contribute to pollution.

Just as gains in the speed of transportation made just-in-time a reality for the automotive industry in the 1970s, the data center industry’s transformation may be driven today by recent technology advances and supplemented with an overall recognition in the industry that the old way of powering and cooling data centers will no longer be ignored by the public nor economically advantageous for companies. These recent advances include:

• The rise of readily available modular data center components, including Uninterruptible Power Supplies (UPSs), cooling and power distribution systems. These components are the infrastructure that can efficiently and reliably power and cool expensive computing equipment. Prior to the availability of modular components, data centers were almost always custom-built, and because of this, they were almost always overprovisioned to accommodate future growth or spikes in demand.
• The rise of standardized components in the data center, especially related to data center infrastructure. Part of the success of just-in-time was a recognition that relying on trusted suppliers to manufacture parts, so that the automaker could focus on its core competency of manufacturing the automobile, would actually bring about more reliable and better-performing products. Data center infrastructure is much the same — custom-built systems come with custom problems that take man-hours and money to fix. Standardized components are time-tested to be effective, reliable and predictable, with flaws having been driven out in the manufacturing and testing/validation process.
• The availability of monitoring software that provides visibility into energy usage in the data center. The just-in-time system relies upon signals that would tell managers what the rate of demand for parts was, so that production could be scheduled accordingly. Similarly, advances in data center software and analytics today provide that kind of intelligence for data center managers by monitoring equipment usage and helping to plan for future needs through benchmarking, indicating in advance when capacity may need to be increased.

Standardization is the key to consistency in the data center, while modularity is the key to flexibility. Both characteristics are needed to respond effectively to changes in the IT environment that result from changing business needs. Modular components are pre-engineered and “plug and play,” so that they can evolve with a changing data center’s design over time. Because they are scalable, changeable, portable and swappable, they confer a speed of installation that is akin to the flexibility that most car owners get today when they need to replace or repair auto parts.

Benefits of a Just-in-Time Approach

When Toyota pioneered the just-in-time system, it also built an entire system that the company would adhere to outside of production that would contribute to its success. Part of the system was to cultivate a culture of continuous improvement where its people’s talents would be stimulated and performance would be maximized. To be sure, recent events such as the tsunami in 2011 affected global supply chains and devastated production and supply in Japan, which exposed vulnerabilities in the system. However, the success of the overall system over time, as evidenced by its proliferation into all types of manufacturing as well as other markets including business intelligence in recent years, serves as a testament to the substantial benefits that can be conferred through applying the overall principles of the system.

In the data center, this requires a new approach to thinking about designing and building new systems, one which promises substantial gains in operational efficiencies. Some of these include:

• Outsourcing of non-core competencies. In the auto industry, this included logistical functions such as storage and distribution to third party providers. Modular data centers, effectively, have outsourced the headaches of production, configuration and installation to the manufacturer of the components. They are plug-and-play, making initial deployment and subsequent changes achievable without a great deal of custom work, and they are built in factories under strict quality control and engineered to deliver peak performance.
• Reduced response time to business demands, again due to availability of standardized and modular components. Growth can be planned for in the initial design of the data center, without being deployed and operationalized, which means data centers are “right sized” — operating only with the computing power and infrastructure to fit needs today rather than anticipated needs in the future.
• Improved customer satisfaction and better return on equity, due to the reliability of components as well as energy savings and reduced manual labor. Custom-built data centers can take years to achieve designed performance specifications with respect to measurements such as Power Usage Effectiveness (PUE, a measure of data center efficiency). Prefabricated modules come with design specifications that are verified in the factory before they are shipped.
• Less downtime, as failures in modular components can be identified quickly and easily and replaced in little time, compared to disparate or custom engineered components.

Data centers today, in fact, are already taking advantage of modular data center builds. The Beneficial Financial Group, one of the oldest insurance companies in Utah, needed to add more power and rack space in its data center, with better monitoring and management capabilities and minimal downtime. If it bought a new system or a larger version of the existing system, it would have had to re-engineer the data center completely; instead, Beneficial chose a modular system that integrated power, cooling management and servers with a universal rack design. The installation was completed over a weekend, with no interruption to business, and forecasts estimate the company will gain an annual ROI of 74 percent with a payback period of ten months, due to maintenance and service savings and increased user productivity. In addition, because it can now add servers as the company grows, Beneficial has expanded its data center capability by 300 percent with room for future growth.

Toyota, which spearheaded the just-in-time model, was able to achieve unparalleled growth and eventual industry dominance in the years following its shift. It’s an example of how turning traditional thinking on its head was able to change the entire industry and spawn whole new industries and innovations. Data centers today face a fork in the road, but there is a unique opportunity to take advantage of gains in technology to respond and adapt, making sure they are built not only for the needs of today but for the unforeseen challenges that may come in the next few decades.

Kevin Brown is Vice President, Global Data Center Offer for Schneider Electric and is responsible for leading Schneider Electric’s portfolio strategy and leading innovation to respond to emerging data center industry trends. Kevin is an experienced industry professional in both the data center and HVAC industry with over 20 years of experience in various senior management roles including software and hardware development, sales and product management, and holds a BS in mechanical engineering from Cornell University.

As with previous rounds of predictions he has made — like for 2011 and 2012 — some of what he predicts already kind of makes sense if you’ve been paying attention to the way things are going, but will become more pronounced in the coming year. Others are a little more surprising.

1. “Carryalongs” Dominate Global Computer Markets
Anderson lumps notebooks, tablets and everything in between into a category he has labeled “carryalongs,” and he says they will take their place as the largest segment of computing devices. “Surface and slates and iPads and Kindle Fire and Nexus 10 and everything else that’s got a 7-inch screen plus or minus an inch or so, will be the biggest category of computing device.” Okay, then.

2. Intel: Long Live the King, the King Is Dead
Intel may still be the biggest supplier of chips to the world’s computing devices, but if you look at prediction number one, you know that Intel doesn’t yet play a significant role in the “carryalong” market outside of traditional notebooks. “Qualcomm and ARM are the new William and Kate,” Anderson says. Intel is primarily a supplier to the world’s server vendors. With CEO Paul Otellini retiring in May, the one way out of its current troubles will be to name a new CEO with what Anderson says are “real tech chops.” Otellini, he says, “marked the first time a marketing guy got the CEO job at Intel. Before that they were all engineers, except Craig Barrett who was an operating guy.” Intel, he says, “has lost the consumer stuff, the handheld stuff, the slate and tablet stuff. All it has left are servers. It has lost the mastery that it had.”

3. Net TV Dominates
A majority of U.S.-based homes will have Internet-connected TVs and related products like AppleTV, Roku boxes and so on. This will fundamentally change the production of content in new and interesting ways, and the result will be a lot more cheaper content. “This is going to become what TV is, and the result is that the cable and satellite companies are going to have a tough time. With the exception of sports, this is the end of cable as we know it.”

4. The LTE vs. Fiber Battle Creates Regional Revolutions in Broadband
In certain regions where the only broadband Internet option is a DSL line, LTE wireless devices and services will become the standard replacement, where LTE service is available. “In most cases you’ll be paying more, but you’ll also be getting more. This is a really interesting flip in some regions. It will be interesting to see this fight because it has a lot to do with what’s in the ground.” It will mark the start of a fight between LTE and fiber optic technology that will take a decade to resolve and what Anderson says is a “real revolution” in broadband pricing and provision.

5. Google Gets Its Mojo Back.
Google’s efforts in email, video, smartphones, maps and driverless cars have in Anderson’s opinion opened up new long-term paths for expansion at Google. Having killed off several products and services that weren’t seen as core to its operations, Google will in 2013 look a lot more focused and powerful when compared to Facebook, Apple and Microsoft, he says. “Google has turned an important corner where after all the experimentation, it has created a number of true businesses where they have a foothold and terrific products, and there are more to come.”

6. The Driverless Car Becomes a Serious and Competitive Global Project
And speaking of Google’s driverless car, that’s going to become a thing over the long term. Volvo plans to become a player. It’s not just a curiosity, it will in the future become a real market, he says.

7. eBooks Are the books
Total ebook sales in dollars will beat adult paperback sales in 2013, Anderson says, and will continue on a growth trajectory toward dominating the entire book-publishing business.

8. Enterprise IT Struggles to Achieve Very Modest Gains
“Big Data” may be a big marketing cry that keeps people talking about enterprise IT, but combined sales of hardware, software and other enterprise tech will collectively grow very little on a global basis. “The year-to-year spending increase will be very small, maybe only 1 to 2 percent, even though the companies doing the spending are sitting on trillions in cash.” One exception: Security.

9. Hacktivists Rule.
Hacktivists like Anonymous and those like them will take on an increasingly important and, Anderson argues, permanent role in forcing political entities to become more transparent. They’ll cease being annoying and actually become a longer-term part of the political and cultural landscape. The result? After struggling to keep their secrets, governments will be forced, in time, Anderson says, to become more open.

10. Supply Chain Security Becomes a Major Factor in Global Technology Purchases
“Maybe all that outsourcing wasn’t such a good idea after all” will be the thinking of many CEOs who’ve spent the last decade or more arguing that lower production costs brought about by inexpensive labor costs in China, Taiwan and other countries will cause a big re-think over security concerns. Academic researchers in the U.K. claim to have found what many people have only silently worried might be possible: An unpatchable backdoor on a military grade encryption chip built in a Taiwanese fab. Companies in what he calls “inventing nations,” exasperated by the constant theft of intellectual property that is often traced to China, will grow increasingly uneasy at their relationship with that country and look for ways to bring more production back to their own shores. A new phrase — “clean supply chains” — will gain currency in tech manufacturing circles and will amount to an admission across many industries, not just tech, that today’s supply chain arrangements are “virtually all compromised,” Anderson says. This will lead to talk of ways to relocate manufacturing operations back in the U.S. and other countries. It won’t be easy — China will retaliate against companies that say anything like this publicly. “You almost have to decide to do what Google did and all but leave the country.” Apple is already doing it. Others, he said, will follow.

Martin Hajek

Chatter from Apple’s overseas supply chain indicates that the company has not been cutting corners in its efforts to keep the iPad’s diminutive sibling price-competitive with what will surely be its two greatest rivals in the seven-inch tablet space, Google’s Nexus 7 and Amazon’s Kindle Fire. Apple’s “we just want to make great products” ethos will be as evident in the iPad mini as it is in all the company’s hardware.

Topeka analyst Brian White, who’s been travelling around Taipei talking to component suppliers, says the mini — or whatever Apple chooses to call it — may even be slicker than the new iPad.

“Apple did not skimp on the aesthetics of the much anticipated ‘iPad Mini,’” White says. “In fact, we believe the ‘iPad Mini’ could outshine the new iPad in terms of how the device feels in a consumer’s hands.”

Not much to go on, I realize. But White’s supply chain sources have been solid in the past, and here at AllThingsD we too have been hearing promising things about the iPad mini’s design, which sources say demands a lot of the companies manufacturing it. This is something White has been hearing, as well, and he thinks it could make the device hard to come by initially. “The new ‘iPad Mini’ is more challenging to produce than prior iPad iterations,” he says. “We believe supply will initially be constrained.”

And in another dispatch from the supply chain, The Wall Street Journal reports that some of Apple’s Asian component partners say they have received orders to make more than 10 million units of the smaller tablets in the fourth quarter, roughly double the number of Kindle Fire’s ordered for the quarter.

(Image courtesy of Martin Hajek)

Ciccarese Design

Reporting from supplier meetings in Taiwan, Topeka analyst Brian White says component yields for the device, which is expected to have a 7.85-inch liquid-crystal display, have been “frustrating,” and could leave Apple unable to meet early demand — at least initially.

“Despite continued yield challenges, the supply chain feels the much anticipated iPad Mini is on track to reach acceptable volume levels for a launch over the next month,” White wrote in a note to clients Thursday. “That said, we believe that supply constraints will initially hold back the full sales potential during the first month or so of the launch.”

Which is not to say that Apple isn’t going to sell a lot of iPad minis, particularly if it prices the device aggressively — say, somewhere between $249 and $300. White says he’s confident Apple can sell five million to seven million iPad minis.

(Image courtesy of Ciccarese Design)

Two of the people said the smaller tablet will have a 7.85-inch liquid-crystal display with a lower resolution compared with the latest iPad model that came out in March.

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The consequences of a riot that erupted on Sunday in the Hon Hai Precision Industry Co.’s plant go far beyond the security of Apple’s supply chain, which relies on armies of industrious and docile Chinese workers.

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iFixit

Supply chain sources tell the Korea Economic Daily, the Chosun Ilbo and Reuters that Apple has been reducing its component orders to Samsung. While it continues to rely on Samsung for some iOS device parts, Apple has opted not to use it as a key supplier of the memory chips and displays for its next-generation iPhone. Instead, it has turned to Toshiba, SK Hynix and Elpida Memory for memory chips, and to LG Display for liquid crystal displays.

“Samsung is still in the list of initial memory chip suppliers,” a source with direct knowledge of the matter told Reuters. “But Apple orders have been trending down.”

What’s behind that trend? Well, that’s not entirely clear. A move away from Samsung is certainly in line with Apple’s stated plans to widen its supply chain. A diversified supply chain minimizes operational risk and comes in handy during unforeseen calamities, as we saw following the 2011 earthquake and tsunami in Japan.

That said, it’s hard not to think that Apple’s legal brawl with Samsung isn’t playing some sort of role here. Cutting back component orders for a device like the next-generation iPhone could cause Samsung a bit of bottom-line pain, particularly if it ends up stuck with excess component inventory. What better way to undercut a fierce rival than to disrupt a key and well-established revenue stream?

Samsung and Apple did not respond to requests for comment.

(Image courtesy iFixit)

Ciccarese Design

Preliminary sales data for a group of component suppliers that generate 50 percent to 60 percent of their revenue from Apple rose by an estimated 14 percent month over month in July, according to Topeka Capital Markets analyst Brian White. That’s almost double the average sales increase of 8.5 percent that those suppliers have posted over the past seven years, and the strongest July on record for the group.

Largan Precision, for example, saw its sales rise by 21 percent month over month in July. Genius Electronic Optical, another Apple supplier, saw its sales spike almost as much: 19.7 percent.

Great news for Apple’s upstream supply chain, which had a mediocre June. More to the point, it’s likely indicative of a big manufacturing ramp-up for a fall Apple product launch that may include the next-generation iPhone, along with a rumored iPad mini. As AllThingsD reported last month, Apple is currently planning an event for the week of Sept. 9, with Wednesday the 12th being the likely date.

“The evidence of new products ramping into the September time frame for Apple continues to mount, setting up what we believe will be the biggest second-half product launch in Apple’s history,” White said in a note to clients. “With the iPhone 5 launch and ‘iPad Mini’ on the horizon, along with the potential for an Apple TV in the coming quarters, we believe Apple’s stock is prepared for the next major leg up that could propel Apple to our $1,111 price target over the next year.”

(Image courtesy of Ciccarese Design)

Case in point: J.P. Morgan analyst Mark Moskowitz’s latest prediction on Apple’s fall iPhone production ramp-up. Information coming out of Asia’s Apple-related supply chain suggests it is well poised for a big fall push.

According to Moskowitz, Apple can produce 20 million so-called iPhone 5 units in the September quarter, and an additional 39 million in the December quarter. And if that proves to be the case, Apple will meet or beat J.P. Morgan’s total iPhone unit estimates of 39.4 million for the December 2012 quarter and 37.8 million units for the March 2013 quarter.

Those numbers are for all shipping versions of the iPhone, but the forthcoming model will obviously make up the bulk of them. Said Moskowitz, “We estimate that iPhone 5 units could be 50 percent to 60 percent of total iPhone shipments in the first two quarters of volume ramp, scaling up after that.”

One final point worth noting: Moskowitz, too, believes that Apple is preparing to launch a smaller version of the iPad, perhaps before the end of the year. “As for the iPad, there are increasing signs in the supply chain of a new and smaller form factor to be potentially introduced later this year,” he writes. “While we have previously regarded an iPad mini launch as more of a C2013 or later event, we are starting to become more flexible in our view as it relates to a potential C2012 event.”

A plausible theory, though I’ve not heard anything that would confirm it. One thing is certain, though. The tablet market still lacks a true second-place contender, and Apple CEO Tim Cook has said many times now that the company has no plans to leave a price umbrella around the iPad that would allow a rival to shake its dominance by introducing a lower-cost device.

The earliest indicator so far isn’t a good one: Intel rival Advanced Micro Devices (AMD) warned last week that sales are going to be much lower than previously expected, and cited anemic markets in Europe and China as the reason. Intel often has the muscle to resist these swings in demand more readily than AMD does, but in some measure, the trends can’t help but hit them both.

Enough signs of trouble were there for analyst Mike McConnell of Pacific Crest Securities in Portland, Ore., to lower his estimates on Intel in a note to clients issued July 15. Demand for PC motherboards is down and expected to grow only 5 percent, versus the previous quarter where expectations had been for growth of 10 to 15 percent.

The reason: Demand from PC makers and resellers in China is weakening. That led to a buildup of inventory among motherboard manufacturers, who are now carrying five to six weeks worth of parts in their warehouses, whereas they normally have only a three to four week supply on hand. Inventory buildups are a classic sign of a slowdown in overall chip demand.

McConnell also thinks that in partial response to the inventory buildup, Intel has delayed shipment of a new desktop processor. Fearing a dreaded inventory correction that always slams chip stocks, McConnell trimmed his estimates for Intel’s fiscal year 2012, but not for the quarter Intel is reporting today. He now thinks Intel will finish the year with $2.52 in per-share earnings on sales of $59 billion 2012 EPS versus a prior estimate of $2.64 on $60.2 billion.

For the quarter, he expects Intel to deliver 52 cents a share on $13.6 billion in sales. That’s pretty much in line with the consensus of other Wall Street analysts who expect Intel to report 52 cents on $13.56 billion.

Intel has in recent memory had a tendency to defy the conventional wisdom of the market research houses Gartner and IDC by reporting strong results in markets they don’t track, like Brazil. Now China — long the boomingest of all the booming developing markets — is slowing down. The ripple effect can’t help but sting Intel. The question is: How badly?

Preliminary sales for all but one of a group of component suppliers that generate 50 percent to 60 percent of their revenue from Apple were down 13 percent month over month in June, says Topeka Capital Markets analyst Brian White. That’s well below the average uptick of 1 percent they’ve posted over the past seven years. Worse, sales among these suppliers were down 8 percent sequentially, far short of the 15 percent increase they’ve managed in the same quarter for the past five years.

What’s going on?

Hard to say, really. White speculates that the decline here is likely related to seasonal sluggishness ahead of Apple’s fall product launches, exacerbated by further weakness in non-Apple customers’ sales.

“We believe the combination of seasonal sluggishness during the month of June as new products are expected to launch in the coming months, combined with a reallocation within the supply chain as factors that drove the weak print,” White said in a note to clients. “Additionally, the weakness in tech given the slowing economic environment likely took its toll on non-Apple sales.”

Importantly, White is holding fast to his $1,111 price target for Apple shares, which remains one of the highest around. Still, a data point worth mulling before Apple next reports earnings, on Tuesday, July 24, 2012.

(Image courtesy of CporsDesigns/ DeviantArt)

Seagate, which last month said it would acquire the privately held retail hard drive maker LaCie, also said its gross margins on a non-GAAP basis will be lower than expected, by nearly a full percentage point. Its shares fell by 64 cents, or more than 2.5 percent, in after-hours trading to $24.44, after closing at $25.08 during the regular session. The shares have increased by more than 55 percent this year.

Seagate had been positioned to make out like crazy when the flooding in Thailand last year disrupted the hard drive industry’s supply chain; its CEO played up the crisis for all it was worth. It wasn’t as bad as it could have been, but it was a disruption, and Seagate benefited from less exposure to the affected regions than Western Digital, its primary competitor. Most of the rise in its share price over the last several months can be attributed to that.

The industry didn’t exactly face doomsday, and so Seagate didn’t expand its share of the market quite as fast as it had expected.

Seagate has offered $186 million, or about 4.05 euros per share, for 64.5 percent of the shares of LaCie controlled by Philippe Spruch, the company’s chief executive. The offer amounts to a premium of almost 30 percent.

Anecdotally, I can also say that LaCie’s drives are probably the most popular among people who own Apple Macs. I see its orange-encased ruggedized external drives everywhere Macs are used, and I own about a half-dozen of them myself. From a consumer retail perspective, Seagate has generally struggled to penetrate the Mac-owning market. And as we all know, the size of the Mac market is growing faster than the rest of the PC-owning world.

There’s also LaCie’s considerable retail and distribution footprint to consider. Under terms of the deal, Spruch would join Seagate.

Seagate is approaching the deal from a position of renewed strength. It weathered the flooding in Thailand, which hammered the hard drive industry’s supply chain and caused a shortage last year, better than rival Western Digital.

In the message, first published by 9to5Mac, Cook says Apple is not “ignoring the human cost” of its supply chain, and dismisses accusations that it is complicit in worker abuse as mendacious.

“We care about every worker in our worldwide supply chain. Any accident is deeply troubling, and any issue with working conditions is cause for concern,” Cook wrote. “Any suggestion that we don’t care is patently false and offensive to us. As you know better than anyone, accusations like these are contrary to our values. It’s not who we are.”

And for evidence of that, one need only look at Apple’s supplier-responsibility efforts. If there are problems at overseas suppliers, says Cook, no one is doing more than Apple to prevent them.

“Every year we inspect more factories, raising the bar for our partners and going deeper into the supply chain,” Cook explained. “As we reported earlier this month, we’ve made a great deal of progress and improved conditions for hundreds of thousands of workers. We know of no one in our industry doing as much as we are, in as many places, touching as many people.”

Which is probably true. Apple has been conducting supplier-responsibility audits and issuing reports on them for years now. And it recently became the first tech company to join the Fair Labor Association, which will serve as an independent auditor for its supply chain.

That said, there’s still a lot more to be done, and Apple could likely do it. With the $13 billion in profits it reported earlier this week, and that $97 billion in cash it’s sitting on, it’s hard to argue otherwise.

As a former Apple executive told the New York Times, “Suppliers would change everything tomorrow if Apple told them they didn’t have another choice.”

An overly simplistic argument, I suppose. The solutions to these issues are far more complex than threats over contracts. But again, more could be done. And not just by Apple. There are plenty of other big consumer electronics companies using offshore labor. And ultimately, the biggest driver of these issues isn’t Apple or HP, but our own buying habits.

The company’s profit climbed by nearly 6 percent in the quarter, despite persistent worries that demand for personal computers is down generally in the face of worldwide economic uncertainty, the popularity of tablet devices like Apple’s iPad, and smartphones in which Intel’s chips are not a significant factor.

Yet, as has been the case for the last several quarters, Intel knows the demand for its global markets — specifically Brazil, Russia, India, and China — far better than any industry analyst, and its executives, especially CEO Paul Otellini, have seemed to enjoy bursting the bubbles of the IDCs and Gartners of the world, who continue to preach a catechism of PC doom.

It’s important for the wider tech industry, because if Intel is healthy, it says a lot about the health of the rest of tech. If PCs are selling well, that means consumers and companies are buying them, either to replace new machines or buying a PC for the first time. And if PCs are selling well, then servers are selling well. Behind all that talk about cloud computing and cloud services are physical servers sitting in a data center somewhere, usually containing Intel chips.

The earnings conference call is about to start, so we’ll get some better indications about how and why Intel managed to surprise the Street once again.

2:35 pm: Ah, joining the conference call in progress. CEO Paul Otellini is speaking and, naturally, he’s crowing about Intel landing a chip in a Lenovo smartphone announced at CES last week.

“In the first quarter, we completed the acquisitions of McAfee and Intel Mobile Communications, formerly of Infineon. They will allow us to extend our strategies across computing.”

He’s recounting highlights of the past fiscal year. During Q4, Intel acquired Telap, which specializes in location-based technologies.

Now he’s talking about a smartphone reference design, basically a board around which a phone maker can build and customize. In the reference design is an Intel Medfield chip. Also, a strategic relationship with Motorola Mobility. “While the Lenovo and Motorola designs are first steps, we’re not done making announcements in the space.”

Now he’s talking about more chips for 2012. For example, 70 Ultrabooks are coming to market this year.

2:39 pm: CFO Stacy Smith is speaking. Nice gross margins of 65.5 percent, which were in the high end of the range. That’s Intel’s speciality — efficiency.

Smith: We saw a reduction of orders for microprocessors as a result of the Thailand flooding. The flooding didn’t affect sales directly, he says.

Smith: Q1 revenue will be down a little more from the average seasonal decline, as the flooding will continue to affect sales.

Smith: 2012 growth of revenue in the high end of single digits. Capital spending of $12.5 billion, in order to build a fancy new fab.

Smith: We continue to see strong results in emerging markets, as increased incomes allow more people to afford PCs.

Time for Q&A with the analysts.

First question from Citi: He’s asking about gross-margin projections and revenues. What is the PC forecast assumption that underlies that?

Smith: It will play out similar to this year. There will be some unit growth, and we’ll benefit from a rich product mix. The high single-digit number in perspective. Strip out some things from 2011, we expect it to come down, in part because of lower GDP growth, but we see the same kind of trends in 2012 that we saw in 2011.

Citi analyst asks if the unit costs per chip are coming down.

Smith: That’s a normal phenomenon as we ramp factories to a new process, and then the cost comes down over the course of the year.

A question from Jefferies: As you get more success in the smartphone and tablet markets, I’m wondering if it’s your intention to get more chips up and down the stack, or is it different from PCs?

Otellini: Our intention is to participate broadly in all three of those markets. In tablets, we’ll be well-positioned for that. Who knows where the prices go over time, but we’d use the advanced silicon integration capabilities that we have to drive the costs down. We’re coming in at the top of the smartphone market; we’re aiming at best performance and very good battery life. And the Infineon acquisition has given us a very good position in basic phones. They shipped about 400 million modems.

Jefferies: Do they inherently carry more profitability than the PC processor business?

Otellini: The other guys have lower margins. But we’ll get paid twice. We’ll get paid as the foundry, but also for the architecture.

2:50 pm: Question from Bank of America: There were a lot of announcements on Ultrabooks from CES. Will they cannibalize notebook sales?

Otellini: I have not seen this level of excitement since before Centrino, which was in 2003. Initially, you will see this will be a replacement of existing notebook sales. People will trade up. As we move through 2012 and into 2013 as Windows 8 machines roll out, you have the possibility or even the probability of many of those machines incorporating touch. At that point, the machines incorporate the best of both the PC and the tablet. I don’t know how that plays out, but we’ll be well-positioned.

Question from JMP Securities: I know you don’t guide by segment, but what’s happening on the data center side of the business? And how does Romley change that? (Romley is a future server chip.)

Smith: Let me do a higher-level look. The data-center business can be pretty lumpy, but on a secular basis, we’re pretty confident in the growth trends.

Otellini: We’re seeing stronger growth for Romley than we saw for Nehalem at the same point in its lifespan, two years ago. Initially, it will not drive the same kind of replacement cycle that Nehalem did. It will drive replacement for high-capacity needs. I think this product is the most well-rounded in the genre so far.

Question from Deutsche Bank: Overall, as we look at flood impact, how should we see that snapping back, and against the backdrop of the seasonality?

Otellini: There are more moving pieces as I look out over the next 11 months. Our view is that the industry seems to be hitting the bottom of their output trough in Jan. and Feb. Everyone who seems to want to buy a PC has been able to. There are some stockouts in particular SKUs. You will see some compression of the supply chain. We think there is likely to be some refilling of the pipes in the second quarter, and into the third quarter. Or people will learn to live with leaner supply chains, which is always good for us.

3:00 pm: Question from Goldman Sachs: What’s the incremental growth in capacity? And what is the initial assumption on factory loadings?

Smith: Let’s talk about what’s driving the capital spending. $12.5 billion is a big number, but you have to take in the context of how our business has grown. Then it makes sense. I think my depreciation as a percent of revenue stays in a healthy range. In terms of the makeup of specific capital spending, it’s a two-year cycle as we’re building buildings. That part starts to come down in 2013. Buildings are depreciated over a longer period of time.

In terms of factory utilization, we’re running full-out today. We’re just in the beginning of the 22-nanometer cycle. We took advantage of the flooding by taking some older equipment offline sooner than we would have otherwise. We’re selling every 22-nanometer unit we can get out there.

3:06 pm: Totally missed the question from UBS. Sorry, UBS.

Question from Credit Suisse about Ultrabooks. Are there any sort of milestones you expect — perhaps, say, percentage of total notebooks?

Otellini: Starting with the mix. Core processors are about 70 percent of our mix, and that’s historically high for our premium brand. What we can’t yet predict is the mix between i3, i5 and i7. As we move toward the second half of the year, the mix comes down to i3. In terms of a target, our goal would be to exit the year with about 40 percent of consumer notebooks being Ultrabooks.

3:11 pm: J.P. Morgan asks if Intel is going to continue to spend like a drunken sailor on capital expenditures and R&D.

Smith says Intel is making some important investments this year, but they will come down from here.

A question from Nomura: Android tablet sales seemed like a disappointment in 2011. What was the issue, and is there a reason to be more optimistic this year?

Otellini: They were where I thought they would be, but I was below where others were. Until you get to Ice Cream Sandwich, you’re at a comparison with Apple’s iPad. The other part of that test is the Windows 8 tablets that are being queued up for production. I don’t think anything about the tablet market is settled yet. The jury is out on the long-term segmentation by form factor.

Ew. Questions from Barclays are being turned back. Smith just won’t go where he wants them to go. Too granular.

3:16 pm: Otellini: The data-center storage is not your grandmother’s data-center business of before. Back to lumpy data-center sales, when Facebook or Apple turns on a new data center. We’re seeing a change to the linearity to data-center sales. Expect more short-term lumpiness, but stick to the year-on-year growth.

One more question to go. And it’s from Caris & Co. He’s asking about capex again.

Smith: If you look at spending for capex in 2012, a historically large part of it is the four-factory model. From here, our capex will be a function of two things — the unit growth we see and the speed with which we bring our process technologies to the leading edge. We balance off those decisions as we go forward. With a big increase in units, we’ll spend the capex to support it.

Caris: You’ve taken on some debt in the quarter, as you look for flexibility to buy back more stock.

Smith: Our balance sheet supports taking on more debt, and we certainly have the capability of doing so. We’ve said in the past, our first priority is investing in the business. We bought McAfee and Infineon. We had a significant increase in dividends in 2011, and as a percent of free cash flow. We did take advantage of low interest rates and high-dividend yield to buy back a lot more stock.

And that is the end of the call. Good night!

This is, of course, bad news if you’re in the business of making the commodity Dynamic Random Access Memory chips that go into PCs, servers and smartphones. A state of oversupply coupled with weak demand means the chips command lower prices than they otherwise would. The situation can be good, however, if you’re buying computers, because memory upgrades get cheaper.

The problem, as related by the research firm IHS iSuppli, is a rise in inventories of chips that its analyst Mike Howard describes as “alarming.”

ISuppli measures how much unsold inventory the chipmakers themselves have in their warehouses — which include Micron Technology in the U.S., Elpida in Japan, and the South Korean pair of Samsung and Hynix. The higher the number is, the more intense the downward price pressure becomes.

The stockpile of DRAM chips as of the end of the third quarter of 2011 stood at 12.8 weeks, which is nearly a third higher than it had been three months earlier and double what it was in early 2010. It’s also a lot higher than the typical average of 9.2 weeks.

There are a lot of factors creating the glut. Tablets like the iPad and Kindle Fire are eating into notebook sales, and don’t require nearly as much DRAM as notebooks do. And new operating systems don’t require the incremental boost in onboard memory as had been typical.

Nor is the economic uncertainty caused by the sovereign debt crisis in Europe helping. Flooding in Thailand has also disrupted the supply of hard drives which has in turn affected the overall demand for PCs and servers. Computer makers who can’t get hard drives simply won’t build as many computers, and thus won’t be buying the DRAM they otherwise would be.

Something similar happened in 2008 when the global recession sapped computer demand and caused a pileup of DRAM chips that lasted nine quarters. This cycle could turn out to be worse, iSuppli says.

Overall, iSuppli reckons the market for DRAM chips was worth about $6 billion in the fourth quarter of 2011, down by 11 percent from the prior quarter, and it’s only heading further south. The worst, Howard says, is apparently yet to come.

If the economy turns upward, or even is perceived to be on the mend, the glut can work its way down pretty quickly. In 2009 the stockpile dropped by more than half over three quarters.

And if it seems obvious that these chip companies should just stop making DRAM and let demand catch up with supply, it’s actually not that easy. Chip factories, or fabs, contain billions of dollars worth of manufacturing equipment running processes that are difficult to stop and start. Also, it’s more expensive to have them sitting there doing nothing but depreciating than turning out a product that brings in revenue, even if it’s running at break-even or a slight loss.

Global sales of semiconductors were $25.1 billion in November, representing a decrease of 2.4 percent from October. On a year-to-date basis, global chip sales were up by 0.8 percent versus the same time in 2010.

Last month, Intel slashed its sales outlook by $1 billion on concerns that effects of floods in Thailand would impact demand for PCs, and thus for its microprocessors. The flooding has caused what’s being described as the most significant supply chain disruption to the PC and server industry in a generation.

SIA President Brian Toohey described the disruption as a near-term problem. “Supply chain disruptions resulting from the floods in Thailand have impacted semiconductor sales in the near term, however OEMs” — PC and other electronics manufacturers — “are expected to recover production losses over the course of the next few months,” he said in a statement.

“November sales were additionally affected by the continuing European financial crisis which is having a broad impact on other economies and global demand,” he said. The impact from Europe is especially clear in the 11.5 percent drop in sales to that region, which you can see in the chart below, a screen-grab from the SIA’s press release.

(Image credit: iStockphoto | V777999)

White’s checks with Apple’s top Taiwan-based suppliers show a massive spike in component orders for the month — well above anything previously charted.

Typically, Apple’s supply chain shows a 2 percent increase in sales from month to month. But this past November, sales rose 17 percent.

That’s a more than an 8x increase.

Which obviously suggests some pretty strong demand trends in the run-up to the holiday shopping season. And Apple is certainly well poised to exploit them. As White observes, “The company’s portfolio for the holiday season is the hottest we have ever seen with the new iPhone 4S, iPad 2 and MacBook Air.”

So Apple’s first quarter will likely be a big one. And it will likely set a new record. Which means 2011 will be much like 2010, and 2009 before it. The fourth quarter of the calendar year has always been Apple’s strongest. No reason to believe it will be any different this year.

The country is now beginning the arduous job of cleaning up from the floods that killed upwards of 600 people and dealt a body blow to its industrial and manufacturing base.

One industry hit especially hard is the computer business. The world relies on factories in Thailand to turn out critical components used to build hard drives, and factories there are out of commission for now. This is not a trivial problem — the factories in question are not easy to replace, retool and restart once they dry out. Nor is the answer simply for the hard drive manufacturers to build new factories somewhere outside the flood zone.

This is the kind of supply chain disruption that the computer industry hasn’t seen in many years. I had a chance to talk with Steve Luczo, the CEO of Seagate Technology, for his view of the situation. Seagate has been relatively lucky in that its factories haven’t been directly impacted like those of Western Digital and Toshiba. But many companies that supply Seagate with necessary components have been hit, and it will be some time before they’re back on their feet.

Luczo told me that the computer industry as a whole — including companies who make PCs, servers, workstations and any other device that contains a hard drive, whether a set-top box or an enterprise storage device — can expect acute supply-chain disruptions to last well into 2012, and that it will take until the end of 2013 for the industry to return to its pre-flood operating posture. You read that right: It will be two years before the supply of hard drives is anywhere near “back to normal,” and there are simply no easy solutions for getting it fixed.

An estimate by the market research firm IHS iSuppli pegs the available supply at 125 million units, which is about 29 percent short of demand of 175 million units. By its reckoning, more than one-quarter of the world’s hard drive manufacturing capacity has been disrupted in one way or another, including 45 percent of the capacity devoted to making hard drives for personal computers. I spoke with Luczo by phone yesterday, and tossed in an extra eighth question because of the importance of the subject.

AllThingsD: Steve, at a high level, I think everyone understands the problem. There’s been a terrible flood in Thailand, and a lot of factories that make crucial parts for hard drives are out of commission. To that end, I think people expect this to be a temporary problem that works itself out in a couple of months. But you say it’s a much more complex problem than most people realize. You’re tracking this situation day to day, and probably hour by hour. So, how bad is it, really? And what’s likely to happen?

Luczo: What’s surprising to us is that even with all the data out there — we’re six weeks into it — there are a lot of fairly sophisticated companies that haven’t fully come to grips with the depth of the problem and the duration that is likely to occur. What is going to happen in the next couple of weeks is that the real shortage begins to show up right about now. There was already a lot of built inventory and a lot of finished goods moving through the system. And now all that is gone, and I think customers are starting to see shelves of parts go empty, and realizing that they’re not going to be filled for anywhere from one to two months. So the concern is heightened.

We heard Meg Whitman talk about this on HP’s earnings call Monday. She said HP stepped in and started doing some strategic buying. She says HP is going to see effects at least through the first half of next year. Apple talked about it on its earnings conference call, too. Are you hearing from them?

Tim Cook at Apple was way in front of this. I saw Tim the first week it happened, and took him through the situation, and in 15 minutes he understood the magnitude of it. Meg was on the second week of her job as CEO when I went to see her, and she got it right away. HP’s procurement VP, Tony Prophet, was also early to understand this. Companies like that reached out to us early on, because they understood that this is going to be an extended problem. They started asking for longer supply agreements. Deals that would typically last about a year, they’re now asking for two years.

How bad is it really going to be? What’s your outlier worst-case scenario, and then what do you think is a little more realistic?

If you think pre-flood, a mix [of products] that the customers need, the industry had the capacity to ship about 190 million units a quarter. Pre-flood, we expected the demand to be pretty consistent at about 180 million a quarter, with a bump in September 2012 for Windows 8. We now believe the March quarter is going to much more difficult than the December quarter, and December is going to be about 120 million or so. We think the March quarter will be about 120 million, in the best-case scenario. And that’s with customers mixing down pretty aggressively; and by that, I mean companies like Western Digital, who don’t have access to the sliders [a critical component in a drive], are shipping one- and two-headed devices so they can ship more units. So instead of shipping a drive that contains two disks and four heads, which is what the market needs right now, they’ll be shipping a one-disk, one-head or one-desk, two-head product. They’ll be maximizing the units they can sell, rather than shipping the product the customer actually needs. … So we see something like 130 million for March on the optimistic side, and then 150 million for June, 170 for September and then 190 million for December. And so by the end of 2012 you’re back to being close to industry demand. But even then, you’ve not included the impact of that missed 100 million units. And that will take another year to absorb, because it’s not like the industry is building new factories to chase that demand. We can’t over-invest to meet some bubble and then get stuck with excess capacity.

I think, intuitively, people expected companies like Seagate to just build more factories outside of the flood zone, but it’s not that simple, is it? Would this not be a moment to add capacity?

There are some in the investment community who think that’s what is going to happen, and that there will end up being a supply glut after all this is over, but it’s not the case. For us, it’s more a function of how to recover the supply chain and then work with the customer to get a good read on what their needs are for the next several quarters. If we see a multiquarter shortage that goes beyond what I described before, then we would think about maybe putting some capital in place. But we’re not going to do that to solve a temporary problem, because we end up being stuck with the excess capacity. Now if it turns out there is no recovery, and then the industry is more constrained than I first described — and that, by June, the industry is still 30-40 million units short and looks like it will be for the next six quarters — we might revisit. But then we’d want longer-term commitments to make sure we’re not overinvesting. But we’re not to that point yet.

What is this doing to prices? And what does that mean to the person who wants to buy a computer or server this year or next year?

If you look at a 10-year moving average trend, the industry has in general seen prices come down about 2 to 3 percent a quarter, and that is for a particular product. In 2009, there was a little price erosion, and that was because the storage industry recovered quickly from the recession. And there had been massive capital cutbacks, so there were big shortfalls through all of 2009 and into 2010. Then, when the Greece crisis happened, that put a big flatline on a lot of growth, and the industry had put in a lot of capital because everyone expected there would be growth. So, since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs [original equipment manufacturers, or the PC and server manufacturers like Apple, HP and Dell, who buy directly from Seagate], you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever.

The markups in the channel are much higher? Are the channel guys taking advantage of this?

Yes, they’re higher, but I don’t think they’re taking advantage. I’ve heard stories about drives that we sell to OEMs for $60 that show up in the channel at $105. Normally the channel price is within about 10 percent of the OEM price. It’s just the law of supply and demand. They can’t get supply. The channel is getting about a third, at most, of the supply they would typically get. The OEMs are the ones with the supply agreements, so everyone in the channel is way short. In some market segments, supply is about 70 percent below what the demand is. And so those shortages are very acute. The channel is selling the few drives that are out there to whoever needs them the most and is willing to pay for them.

So what does all this mean for Seagate, specifically?

For us it’s a different story, because we’re going to be driving more volume than our competitors, because we’re not as directly affected, and we’re going to be making some  technology transitions. When we do that, it lets us take cost out of our product, so we can offer more capacity for the same or fewer parts. That helps us drive down pricing. Our goal is to recapture some of the more aggressive pricing of the last eight quarters, in order to sort of get our business back in balance. Our long-term business model calls for gross margins of 22 to 26 percent. And we use our manufacturing expertise to drive down our costs and then pass that on to our customers. This quarter, end users really won’t see it, because product has been built and has been on the shelves. As the shortages just started occurring, you’re starting to see prices increase in the channel. And then at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages.

One thing that occurred to me when I first wrote about this a month or so ago is that it represents an opportunity for the flash memory chip companies to make some inroads against hard-drive guys like you, mainly on notebooks. Is there a threat that flash could pick up some of the demand?

Some of it, but not very much. I think to the extent that there is a high value purchaser who can afford to pay $200 for 100 gigabytes, then that market will expand from 1-2 percent to 3-4 percent. Of the 35 to 40 percent shortage that exists, could you see a little of that get absorbed by silicon? The answer is yes. But there’s a cap. There’s just not enough of a raw supply of silicon to meet all the demand. Our industry will ship 400 exabytes this year. We would have shipped 450, were it not for the floods. Of that, 180 exabytes is notebooks. Reduce that by 30 percent, and you get about 55 or 60 exabytes. If you were to take all of the capacity from Samsung’s newest state-of-the-art flash factory, and dedicated it just to notebooks, it would only put out 7 exabytes a year. Plus, there are already other markets demanding flash, like  tablets and cellphones and other things. So it’s not like you can steal from those other markets. You’re not going to take a $32 product and replace it with a $350 product. Can you do it at the edges of the market? Sure. But the threat is capped by the amount of silicon available and the price point for flash storage, which is still an order of magnitude higher.

Western Digital CEO John Coyne warned yesterday on a conference call with analysts that the company expects significant impact to its hard-drive manufacturing operations in that country. It is one of several tech companies that has suspended operations in Thailand amid the worst flooding there in a half century.

Seagate, which reported earnings yesterday, also has operations in Thailand and said those are running at full capacity, but that some of its component suppliers have been affected by the floods.

“Given the severity of the situation and the extensive supply constraints caused by the disruption … the effects on our industry are likely to be substantial and will extend over multiple quarters,” Seagate said in a statement.

With the prospect of an industrywide shortage of hard drives affecting one vendor but not the other, shares of Seagate today shot up by $3.36, or more than 27 percent, to $15.42; Western Digital fell nearly 10 percent yesterday, but recovered today.

I checked in with Fang Zhang, who tracks storage for IHS iSuppli, the research firm that covers the electronics supply chain. While it’s too early yet to know the full impact, her initial estimate says that the worldwide production of hard drives will drop by about 30 percent, from 176 million units projected pre-flood to 125 million drives in the fourth quarter.

Apple CEO Tim Cook addressed the potential for a shortage on Apple’s earnings call with analysts on Tuesday because, naturally, it will affect his ability to turn out Macs this quarter and probably into next year. “I’m virtually certain there will be an overall industry shortage of disk drives as a result of the disaster,” he said.

One question I have is whether this could turn out to be an opportunity for the solid-state storage companies — the main supplier that comes to mind here is Samsung — that are popularizing flash-memory based storage drives in PCs like the MacBook Air and other machines. Will they boost production to fill that gap?

(Image via Consumer Queen.)

Supply chain sources tell the Commercial Times that Pegatron Technology has received orders to build another five million iPhone 4S handsets; this is in addition to the 10 million it has already been contracted to produce.

Pegatron is the smaller of Apple’s two iPhone 4S OEM partners — the larger being Foxconn. It had initially been tapped to handle about 15 percent of the device’s production load, with deliveries not scheduled to begin until early 2012.

But supply chain insiders now claim Apple is looking to take delivery of a few million of them before the end of the year. Which may mean that demand for this latest iteration of the iPhone is greater than even Apple expected. Add to this record first-day sales of one million and it’s pretty clear that consumers are as enamored of the 4S as they were of each version of the device that preceded it.

As Brian White of Ticonderoga Securities observed earlier this week, “While the unveiling of the iPhone 4S received a muted response, both from the market and tech blogs, the customers have the final word, in our view, and they have spoken with resounding enthusiasm for the iPhone 4S.”

MF Global FXA Securities analyst David Rubenstein says the company is considering a $1 billion investment in a Sharp LCD plant. “We think it is highly possible that Apple will make an investment in Sharp’s Kameyama plant to the tune of around US$1 billion in order to secure a stable supply of screens for iPhones and iPads,” Rubenstein wrote in a note to clients today.

Though unconfirmed at this point, such a move would make perfect sense for Apple, which must surely be looking to diversify its component suppliers as a hedge against supply chain disruptions, whether they be caused by industrial accidents, natural disasters or ongoing patent disputes with key suppliers like Samsung.

But according to IHS iSuppli, that’s a best-case scenario. The research outfit offers a decidely less optimistic view of the incident, suggesting that the disruption at Foxconn could cost Apple as many as half a million iPads.

“Total iPad 2 production capacity at the Chengdu site amounts to about 500,000 units per month,” iSuppli reports. “If the explosion results in a production shutdown until the end of June—which may or may not happen, depending on the outcome of the still-pending investigation—a production stoppage of half a million units could result.”

The longer the production suspension lasts, the greater the impact on inventory. And at present Foxconn has closed all facilities like those at which the explosion occurred pending further inspections.