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Does the Japan–South Korea Row Imperil Apple’s iPhone Business?

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The ongoing Japan–South Korea dispute has led to Japan restricting South Korea’s access to its high-tech raw materials, Reuters reported. The report noted that this restriction is related to a “growing dispute over South Koreans forced to work for Japanese firms during World War Two.” Japan has restricted the export to South Korea of raw materials that are critical to the manufacturing of chips and display parts used in electronic devices such as smartphones.

Japan’s restriction on the flow of these raw materials is bad news for South Korean semiconductor companies like Samsung (SSNLF). We believe that Apple’s iPhone business could also suffer if South Korean companies cannot secure enough raw materials from Japan.

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Apple relies on South Korean semiconductor companies for crucial iPhone parts. On July 19, MacRumors reported that Samsung supplies the OLED screens used in iPhones. That report added that Apple might use OLED screens from LG Display in some of the 2019 iPhone models. Like Samsung, LG is a South Korean company.

In our view, if Samsung and LG cannot secure enough raw materials to meet the demand for their displays, that could hurt iPhone production and Apple’s iPhone business.

Risk to the supply chain

Apple sources most of its OLED parts from South Korea–based Samsung and LG. The inability to access adequate parts could cause production delays in Apple’s 2019 iPhone models. Apple typically unveils its new iPhone models in September, and they go on sale shortly thereafter. We believe that Apple risks facing component shortages in South Korea over this Japan–South Korea issue at a critical point of its iPhone production.

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The risk that this dispute poses to the semiconductor supply chain concerns Apple, Amazon (AMZN), Google (GOOGL), and Microsoft (MSFT). The Investor reported on July 18 that these companies sent representatives to South Korea to gauge the impact of this dispute. These companies source parts such as memory chips for their hardware products from South Korean suppliers.

iPhone business shrinking

The Japan–South Korea dispute that risks disrupting semiconductor supplies couldn’t come at a more challenging time for Apple. Apple is already struggling to stabilize its iPhone business amid falling sales, shipments, and revenues.

In the June quarter of 2019, iPhone shipments totaled 35.3 million units, according to IHS Markit estimates. That figure was down from 41.3 million iPhone units that Apple shipped in the June quarter of 2018. Apple’s iPhone revenue declined 11.8% to $26 billion in the June quarter of 2019.

Also, AAPL’s iPhone business contributed only 48% of total revenue in the last quarter, down from 55% a year earlier. Amid weakness in its iPhone business, Apple is trying to drive growth through its Services sector. Apple generated $37.2 billion of Services revenue in fiscal 2018 and aims to grow that to about $50 billion by 2020.

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