There has been some recent speculation that Apple may be cutting back on the production of iPad panels. This would be a source of major concern for its fastest growing product line but it’s more likely a case of Apple and its suppliers trying to gain leverage on each other; something that is becoming increasingly common for Apple.

Apple recently announced it sold 17 million iPads in calendar Q2 2012, an outstanding 84% growth Y/Y. According to Apple, total iPad sales, including iPad 2 and new iPad, reached 29 million units in the first half of 2012. This puts Apple in position to maintain their dominance of the tablet PC market (our latest report showed that Apple increased its share to 63% of shipments in Q1).

However, some in the industry are suggesting that Apple is reducing iPad panel and set production. Several reasons have been offered for this:

• Increased inventory levels, especially panels, at Foxconn, the sole assembler of iPads.
• Apple is not satisfied with the cost reduction path of the panel and component suppliers, and is adjusting the volume downward.
• Although the new iPad is selling well, the ramp is not as steep as for iPad 2. There could be some saturation, leading Apple to control inventory.
• The new iPad uses a 9.7” QXGA display, which is difficult to manufacture with existing TFT LCD processes, due to the high resolution and strict quality requirements. Apple therefore has been adjusting the panel supplier mix.
• The potential for new iPad models. First, it is expected that an iPad “mini” is coming soon, and potentially a “new new” iPad, that will be brighter, thinner, and lighter. Apple could be paving the way for these new models, which would need to be balanced against the new iPad.

Interestingly, in their fiscal Q3 earnings call, Apple did indicate that the iPad 2 was more popular than the new iPad, without specifying why. This may be a key factor fueling concerns about iPad panel production.

If Apple really is reducing orders for the new iPad, panel makers will have to adjust their production strategies, and some capacity dedicated to iPad panel production would be released, increasing oversupply. Some panel makers, like LG Display and Sharp are using advanced 8^th generation LCD fabs to produce tablet PC panels, and some are ramping up oxide TFT technology for iPad panel production.

We do not think it is likely that Apple will dramatically slow iPad panel production, but it is possible that they will make some adjustments, for the following reasons:

• As we reported on July 6^th, cumulative shipments of iPad panels (both the new iPad and iPad 2) from Oct 2011 to April 2012 were 28.5 million, in line with the 29 million units sold in 1H 2012. Since panel production typically leads finished goods sales by 2-3 months, there was not an apparent panel inventory issue in 1H. However, panel shipments in May reached a record 6.8 million units, which might be leading to some inventory adjustment.
• As mentioned above, the high resolution and quality requirements for the new iPad panel, as well as the mix of TFT technologies being used (a-Si and oxide) are causing Apple to adjust the mix of panel suppliers. Apple’s preference is to use oxide in the panels for the new iPad, as this technology enables the use of smaller transistors in each pixel, allowing more light from the backlight to pass through. This allows for higher battery life or brightness. However, challenges in producing oxide TFT have limited its use. The degree to which those challenges can be mitigated in the short term may affect not only how widely oxide is used but also the bill of materials cost.
• It may be that the order adjustment issues are linked with panel pricing issues. Apple may intend to drive the panel price further to reduce the cost of the iPad.

As is often the case, pricing is a key factor in both sourcing and production allocation. From Apple’s perspective, reducing component costs is key to both maintaining profit margins and in being prepared to compete with lower-priced competing products. From the panel maker point of view, producing the high resolution new iPad panel to Apple’s specifications is a significant challenge with either TFT technology. A simple calculation shows that on a price-per-pixel basis, new iPad panels are significantly cheaper than iPad 2 panels, since the pixel count increased by a factor of 4 while the price premium is less than 2X (our assumption is that the price of iPad 2 panels is $55 while new iPad panels are $95).

If inventories have increased, Apple may feel confident in pressing for price declines, but if they are lean, panel makers may have some leverage.