Quality problems sour new Apple iPhone

Added to previous supply shortfalls, a problem with Foxconn's anodised casings loses the smartphone giant up to US$60b in market value

PUBLISHED : Thursday, 11 October, 2012, 12:00am
UPDATED : Thursday, 11 October, 2012, 3:03am

Apple's iPhone 5 supply shortfall is being exacerbated by a quality-control crackdown at the mainland's Foxconn Technology aimed at cutting the number of devices shipped with nicks and scratches, according to industry sources.

The scrapes, which sparked complaints on the iPhone's debut last month, are due to Apple's decision to use a type of aluminium that helps make the phone thinner and lighter. Late last month, senior Apple managers instructed executives at Foxconn to tighten production standards.

Stricter benchmarks had hampered production of the iPhone 5's anodised aluminium housings, forcing Foxconn's Hon Hai Precision Industry - one of the makers of the device - to close factories, the source said.

The slowdown is heightening supply concerns that have cost Apple about US$60 billion in market value since the iPhone debut, a shortcoming of the drive to imbue products with qualities that make them alluring yet more difficult to manufacture.

"The iPhone 5 is not easy to put together because it is a minimalist design," said Shaw Wu, an analyst at Sterne, Agee & Leach. "Apple has a very high standard, where it aims to produce each model to be an exact replica where variance is measured in microns."

While Apple sold a record five million iPhone 5s on the first weekend the device was on sale, the tally would have been higher if not for supply constraints, the company said. Apple shares have declined 9.4 per cent since a record close on September 19, two days before the new iPhone went on sale.

Analysts at RBC Capital Markets have cut their forecast for iPhone 5 sales for the December quarter, partly because of a dearth of components. They project sales of 49 million units, compared with the earlier estimate of 57 million.

Apple, based in California, designs its products in the United States and relies on Foxconn and other contract manufacturers to make them.

Steve Dowling, a spokesman for Apple, declined to comment on the problems.

Louis Woo, a spokesman for Foxconn Technology, denied that any factories were closed and declined to comment on the company's customers.

Every step in the iPhone 5 production process offered opportunities to scratch the soft metal exterior, making it difficult to produce enough of the devices that could meet the new standards, according to workers at Foxconn.

Professional reviewers had mostly positive responses to the iPhone 5, although many had found fault with its mapping application. Some consumers swiftly drew attention to scratches on the phone even before it was unpacked.

"As soon as I opened the box, I noticed nicks and scuffs in the bezel," Matthew Pendergraff, wrote on a discussion board on Apple's website on September 21, when iPhone 5 went on sale. "I realise that at some point this might happen from normal wear and tear, but right out of the box is unaccepted."

An unofficial response from Apple came four days later, in the form of an e-mail from a senior executive to another customer who complained, according to 9to5Mac.com an Apple-focused website.

"Any aluminium product may scratch or chip with use, exposing its natural silver colour," Phil Schiller, Apple's senior vice-president for global marketing, wrote in the note, posted by 9to5Mac.com "That is normal." Within days, Apple executives were expressing their displeasure to Foxconn.

The clash between quality and quantity in iPhone 5 output is felt acutely at Foxconn, a unit of Terry Gou Tai-ming's manufacturing empire and the major maker of the housings made out of what Apple calls "anodised 6000 series aluminium", the same material used in its notebooks.

Anodising involves dipping the aluminium into chemicals and running an electric current through it, which helps to protect the metal against corrosion and makes it easier to add colour.

Scratches on the iPhone 5 are more noticeable because of the contrast between the outer colour and underlying metal. The glass casing of the iPhone 4 and iPhone 4S made it less prone to scratches, although it was susceptible to cracks.

"It's a trade-off because aluminium is strong and tougher to break, and it's light and more economical, yet it is also easier to scratch," said Jacob Huang, a professor of materials engineering at National Sun Yat-sen University. "You could use magnesium, which is lighter, but even easier to scratch, or glass which is heavier but more brittle."

As Foxconn Technology tightened standards, fewer housings passed muster, meaning a shortage of parts for Hon Hai, which assembles the device and had to halt production at a factory in Shenzhen on Saturday, according to the industry source.

Five workers at an assembly plant in Zhengzhou said the iPhone 5 was more delicate and easier to scratch during the assembly process.