IBM's chip woes weigh on Apple

Duncan Martell

SAN FRANCISCO: IBM's production problems with the speedy chip used in Apple Computer Inc.'s high-end computers, which led Apple to take the unusual step of delaying its next-generation iMac, underscored the risks of relying on a single supplier but won't hurt financial results in the short term.

Cupertino, California-based Apple will suffer a small financial hit, said Roger Kay, a PC analyst at market research firm IDC, noting that the new iMac will miss out on the crucial back-to-school season. Education sales account for about 25 percent of Apple's total revenue.

Using 2003 shipments figures as a proxy, Kay said that one month of lost iMac production amounted to about 32,000 units, or about $32 million in sales, Kay said, which IDC translated to a bottom-line hit of about $260,000, after production costs, taxes and other costs.

"We looked at that figure and said it's not that big a deal," Kay said. "We think that kind of math is what led the company to make the decision they did (to delay the new iMac launch)."

ALL ITS CHIPS IN ONE BASKET

The problem -- IBM isn't getting enough working chips out of each semiconductor wafer that goes through the manufacturing process at its East Fishkill, New York, chip plant -- may also be straining the relationship between Apple and IBM, analysts said.

It also raised the question again, often asked, of when and whether Apple might turn to a chip supplier like Intel Corp. or Advanced Micro Devices Inc.

International Business Machines Corp.'s snag prompted Apple to take the highly unusual move earlier this month of saying that its next-generation iMac desktop computer -- which it hadn't even announced yet -- would be delayed by about a month.

"We are extremely unhappy with these events," said Peter Oppenheimer, Apple's chief financial officer on a conference call earlier this week to discuss quarterly results.

Later on the call, Tim Cook, head of global operations for Apple said it was "not commercially feasible or reasonable to think about another entire company" making the chip in the near term.

"There's no place else for Apple to go" to have that chip made, said Schwab Soundview Capital Markets analyst John Jones, noting that only a handful of companies, IBM and Intel among them, are making chips with 90-nanometer technology.

On a conference call to discuss second-quarter results, IBM Chief Financial Officer Mark Loughridge said that production levels of the PowerPC chip are rising.

Other companies, including Intel, have had problems churning out sufficient numbers of perfectly working chips using 90 nanometer technology from dinner-plate-sized semiconductor wafers, analysts said.

"From Apple's point of view, it's not really an IBM story, it's a 90-nanometer story and for them they just have to be patient," Kay said.

MISSING BACK TO SCHOOL SALES

Apple said on July 1 it had planned to have the next-generation iMac ready by the time its inventory of current iMacs ran out by the end of the month.

For now, Kay said that what G5 chips Apple does get, it is using in its professional computers, the Power Macs.

Apple said this week it expects shortages of its dual 1.8- gigahertz and dual 2.0-gigahertz Power Mac computers in July but supply should catch up in August. Its high-end dual 2.5- gigahertz Power Mac will be constrained throughout its current quarter, which ends in September.

(Additional reporting by Caroline Humer)