Apple Earnings, Supply Chain Speculation, China and Industrial Design

# Apple Earnings, Supply Chain Speculation, China and Industrial Design

Apple's earnings could have been higher but the company couldn't get enough chips; then, once again a new design meant higher sales in China. 

Good morning,

Jon at Asianometry has a video response to my [TSMC Risk Article](<https://stratechery.com/2026/tsmc-risk/>) entitled [Silicon Valley Thinks TSMC is Braking the AI Boom](<https://www.youtube.com/watch?v=2lLFBun1qR0>); he thinks I need to exercise a little patience.

On to the Update:

### Apple Earnings

From the [Wall Street Journal](<https://www.wsj.com/tech/apple-earnings-q1-2026-aapl-stock-e25fbdbf>):

> Apple reported blowout iPhone sales and profits in the December quarter, but shares stayed flat after-hours because of investor concerns about rising costs. Revenue from iPhones rose 23% to $85.3 billion compared with the prior year as customers, excited by the new iPhone 17 lineup, upgraded their devices faster than usual. That powered Apple to record quarterly sales of nearly $144 billion, results that exceeded Wall Street expectations. Sales were particularly strong in China, where Apple’s results have been uneven in recent years…
> 
> Investors who have knocked the stock off its record high are monitoring Apple’s projections for costs this year. New demand for artificial-intelligence data centers has pushed prices up sharply in recent months for materials that go into Apple devices. The increases have been acute for memory components that make iPhones faster and for storage where people keep their ever-expanding libraries of photos and video. The chips that power devices are also growing more expensive, say analysts. Apple shares rose about 1% in after-hours trading following the release of the financial results.

There’s no ifs, ands, or buts about it: this was a monster quarter for Apple generally, and the iPhone in particular. What is especially notable is that sales could have been even higher. CEO Tim Cook said [on the earnings call](<https://sixcolors.com/post/2026/01/this-is-tim-complete-transcript-of-apples-q1-2026-financial-call/>):

> We were thrilled with the customer response on the latest iPhone lineup. It exceeded our expectations, to say the least, and, you know, iPhone grew 23%. What the result of that was, was that we exited the December quarter with very lean channel inventory due to that staggering level of demand, and based on that, we’re in a supply chase mode to meet the very high levels of customer demand. We are currently constrained, and at this point it’s difficult to predict when supply and demand will balance.

The gap between supply and demand was so large that CFO Kevan Parekh suggested in his prepared remarks that Apple might not meet demand for the current quarter either:

> We expect our March quarter total company revenue to grow by 13% to 16% year-over-year. which comprehends our best estimates of constrained iPhone supply during the quarter.

What is notable, however, is that this isn’t just a demand story: Apple is facing supply challenges, and Tim Cook was very explicit — on multiple occasions in the call — that the constraint was TSMC. This was his first reference:

> The constraints that we have are driven by the availability of the advanced nodes that our SOCs are produced on, and at this time we’re seeing less flexibility in the supply chain than normal, partly because of our increased demand that I just spoke about.

His second reference:

> On the supply side, I had made comments earlier about the constraint that we are seeing in Q2, and that’s reflected in the revenue guidance that Kevan gave earlier. The constraint, as I’d mentioned, is due to the advanced node capacity, and it’s really a result of growing so well in Q1 with the 23% and having less flexibility partly due to that in the process to increase it as much as we would like to increase it. Beyond Q2, I don’t really want to comment on supply. Supply is the function of a lot of things in the industry that move around a lot, so I wouldn’t want to comment on that.

His third reference was to correct an analyst who thought the constraint was packaging (Apple ships a monolithic chip, not chiplets):

> It’s difficult to estimate demand when you haven’t met the demand. And so obviously we have internal estimates on that, but I don’t want to share those. But it’s very difficult. And just to be clear, it’s the advanced nodes, like three nanometer to be specific, where the latest SOCs are produced on, as to what is gating the Q2 supply. And it’s a direct result of the 23% growth and that far outstripping what we had internally estimated and having more limited flexibility in the supply chain for some period of time. But I don’t want to estimate when supply and demand will balance at this point.

Apple’s supply miss appears to have two components:

  * First, Apple didn’t accurately forecast just how popular the new generation of iPhones would be, which means they didn’t order enough of the A19 Pro chips (and they put some number of A19 Pro chips into iPhones Air, which don’t appear to have sold very well, even though it’s the best iPhone ever!).
  * Second, when Apple went back to TSMC for more chips, it sounds like TSMC did not have additional capacity to make more.

In terms of that second point, it’s important to note that it takes multiple months to make new chips, from wafer to fabrication to testing to packaging. That means that even if Apple put in a new order on, say, October 1, it’s not going to have those chips until February or March.

Still, I find it notable that Cook was so explicit about placing blame for the supply shortage: one certainly gets the impression that this isn’t a specific shortage that Apple has encountered before, particularly since the company almost certainly orders plenty of chips ahead of time, given the lead time and the fact they will use those chips well into the future. Then again, it’s also worth noting that Apple, starting with the A17 Pro, started making different chips for the Pro and regular phones; those Pro chips are only used for one model of iPhone and only for one year, which means there is more danger in over-ordering. It’s definitely possible that Apple simply misjudged its A19 Pro demand in particular.

### Supply Chain Speculation

What I am most curious about, however, is if Apple’s ordering behavior was impacted at all by the demand for TSMC’s most advanced nodes. The A19 and A19 Pro are made using TSMC’s N3P process, but so is the Qualcomm Snapdragon 8 Elite Gen 2, AMD’s MI350 AI GPU, Microsoft’s new Maia 200 inference chip, and Amazon’s Trainium 3 chip. Qualcomm’s presence isn’t a surprise, as Qualcomm has regularly been the second customer to a new TSMC node; the other three, however, are something new in terms of the speed with which they are on the most advanced process (driven, of course, by the AI opportunity).

To that end, is it possible that previously Apple was able to make as many chips as it wanted and stockpile them, but this time around it was limited in the number of lines it could control and had to take more of a “just-in-time” delivery schedule? This is pure conjecture, to be perfectly clear, but it certainly seems plausible that Apple developed a lot of internal assumptions about TSMC capacity that didn’t work out this time around, and there certainly are some obvious reasons why that may be the case.

It is going to be very interesting to see how Apple navigates the new supply environment. From another article in the [Wall Street Journal](<https://www.wsj.com/tech/the-ai-boom-is-coming-for-apples-profit-margins-4774013d>):

> Apple has dominated the electronics supply chain for years. No more. Artificial-intelligence companies are writing huge checks for chips, memory, specialized glass fiber and more, and they have begun to outduel Apple in the race to secure components. Suppliers accustomed to catering to Apple’s every whim are gaining the leverage to demand that the iPhone maker pay more. Apple’s normally generous profit margins will face pressure this year, analysts say, and consumers could eventually feel the hit…
> 
> AI chip leader Nvidia recently became the largest customer of Taiwan Semiconductor Manufacturing, or TSMC, Nvidia Chief Executive Jensen Huang said on a podcast. Apple had been TSMC’s biggest customer by a wide margin for years…TSMC, the Taiwanese chip manufacturer, has built successive generations of its most advanced chips with Apple as its lead customer, relying on the big predictable demand for iPhones. Now that TSMC is doing more business with Nvidia and other AI companies, people with knowledge of the chip supply chain said Apple was exploring whether some lower-end processors could be made by someone other than TSMC.

The most pressing issue for Apple (and everyone else, for that matter) is going to be memory; Apple forecasted company gross margins of 48–49% for the current quarter, suggesting that it has enough inventory and/or pre-negotiated deals for its needs for now, but it will be interesting to see what happens down the road.

More generally, Apple has been the king of the supply chain for so long now, it will be fascinating to see how the company handles having to fight for supply instead of dictating terms. It’s totally possible that the chip delays impacting sales is just a missed forecast in the face of massive demand; it’s also possible that the company’s supply chain flunked its first test in this new competitive environment.

### China and Industrial Design

From [Bloomberg](<https://www.bloomberg.com/news/articles/2026-01-30/apple-rebounds-in-china-with-biggest-sales-quarter-in-four-years>):

> Apple Inc. enjoyed a sharp rebound in China during the holiday period, when demand for the new iPhone 17 fueled its first $25 billion quarter in the region since the end of 2021. The company generated sales of $25.5 billion from its greater China segment during a three-month span that ended Dec. 27. The revenue soared 38%, smashing Wall Street’s average estimate of $21.8 billion and far outpacing total sales growth.
> 
> The numbers cap a surprising recovery for the company, which has struggled to regain momentum in China — a onetime growth engine. The revenue was Apple’s second-highest quarterly total ever in the region, nearing a holiday-quarter record of $25.8 billion from four years ago. Chief Executive Officer Tim Cook attributed the performance to a surge in smartphone upgraders. Switchers from other platforms also grew by a double-digit percentage, he said. That increased the installed base in greater China and mainland China to all-time records.

Back in 2017, I wrote an Article called [Apple’s China Problem](<https://stratechery.com/2017/apples-china-problem/>) that made the case that the dominance of WeChat in particular meant that iOS as an operating system was less of a differentiator in China than in other markets; this meant that Apple’s competitive position in China was much more precarious and much more dependent on the phone’s industrial design:

> Plenty of folks — more than last year — are happy to buy the iPhone 7, even though it doesn’t look much different than the iPhone 6. After all, if you need a new phone, and you want iOS, you don’t have much choice! Except, again, for China: that is the country where the appearance of the iPhone matters most; Apple’s problem, though, is that in China that is the only thing that matters at all.
> 
> The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat…Naturally, WeChat works the same on iOS as it does on Android. That, by extension, means that for the day-to-day lives of Chinese there is no penalty to switching away from an iPhone. Unsurprisingly, in stark contrast to the rest of the world, according to a report earlier this year only 50% of iPhone users who bought another phone in 2016 stayed with Apple:
> 
> This is still better than the competition, but compared to the 80%+ retention rate Apple enjoys in the rest of the world, it is shockingly low, and the result is that the iPhone has slid down China’s sales rankings: iPhone sales were only 9.6% of the market last year, behind local Chinese brands like Oppo, Huawei and Vivo. All of those companies sold high-end phones of their own; the issue isn’t that Apple was too expensive, it’s that the iPhone 6S and 7 were simply too boring.

It almost seems too simple to have the heuristic that a new industrial design means higher sales in China, but the iPhone 17 was a new design, and iPhone sales went up in China! Moreover, this is a pattern that has held for the iPhone’s entire run in China:

The first iPhone on this chart is the iPhone 6, which was the first iPhone on China Mobile; the second phone is the iPhone X which featured a new industrial design; the third iPhone is the iPhone 13 Pro which featured a new industrial design; the final iPhone is the iPhone 17 Pro. Each significant change in outward appearance was correlated with higher growth in China.

These correlations aren’t perfect: the iPhone 12 sold well, for example, although that may be explained by COVID. What I think helps my case is that the iPhone 15 Pro is not on this chart: that had a new material (titanium) and USB-C, but it still looked like the old iPhone, which is perhaps why it didn’t move the needle.

I wrote in the conclusion of that 2017 Article:

> None of that lock-in exists in China: Apple may be a de facto monopolist for most of the world, but in China the company is simply another smartphone vendor, and being simply another smartphone vendor is a hazardous place to be. To be clear, it’s not all bad: in China Apple still trades on status and luxury; unlike the rest of the world, though, the company has to earn it with every release, and that’s a bar both difficult to clear in the abstract and, given the last two iPhones, difficult to clear in reality.

Apple cleared it with the iPhone 17. Next year might not go so well.

* * *

This Update will be available as a podcast later today. To receive it in your podcast player, visit Stratechery.

The Stratechery Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a subscriber, and have a great day!