Stricter production standard hampers supply of the iPhone 5’s anodized aluminum housings

Apple Inc.’s iPhone 5 supply shortfall is being exacerbated by a quality-control crackdown at Foxconn Technology Group that’s designed to cut the number of devices shipped with nicks and scratches, according to a person familiar with the matter.

The scrapes, which sparked complaints with the iPhone’s debut last month, are due to Apple’s decision to use a type of aluminum that helps make the smartphone thinner and lighter. Senior Apple managers told executives at Foxconn near the end of September to tighten production standards, said the person, who asked not to be named because the matter was private.

Stricter benchmarks have hampered production of the iPhone 5’s anodized aluminum housings, forcing Foxconn’s Hon Hai Precision Industry Co. (2317) to idle factories, the person said. The slowdown is heightening supply concerns that have cost Apple about $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’s a minimalist design,” said Shaw Wu, an analyst at Sterne, Agee & Leach Inc. “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 5 million iPhone 5s 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 8.7 percent since a record close on Sept. 19, two days before the new iPhone went on sale. Apple gained less than 1 percent to $640.91 at today’s close in New York. Easily Scratched

Analysts at RBC Capital Markets have cut their forecast for iPhone 5 sales for the December quarter, partly due to a dearth of components. The analysts project sales of 49 million units, compared with 57 million before.

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

Steve Dowling, a spokesman for Apple, declined to comment. Louis Woo, a spokesman for Foxconn Technology Group, whose units include Hon Hai Precision Industry, assembler of the device, and Foxconn Technology Co., a maker of the aluminum housings, denied that any factories were idled and declined to comment on the companies’ customers.

Every step in the iPhone 5 production process, from the manufacturing of the aluminum housing to final assembly, offers opportunities to scratch the soft metal exterior, making it difficult to produce enough of the devices that can meet the new standards, according to workers interviewed by Bloomberg.
‘Normal’ Chipping

Professional reviewers had mostly positive responses to the iPhone 5, though a few had faulted 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 Sept. 21, when iPhone 5 went on sale. “I realize 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 Apple-focused website 9to5Mac.com.

“Any aluminum product may scratch or chip with use, exposing its natural silver color,” Phil Schiller, Apple’s senior vice president for global marketing, wrote in the note, posted by 9to5Mac.com. “That is normal.”
Metal Finish

Within days, Apple executives were expressing their displeasure to Foxconn, according to the person familiar with communications between the two companies.

The clash between quality and quantity in iPhone 5 output is felt acutely at Foxconn Technology Co., a smaller unit of Terry Gou’s manufacturing empire and the major producer of the housings made out of what Apple calls “anodized 6000 series aluminum,” the same material used in its notebooks.

Anodizing involves dipping the aluminum into a bath of chemicals and running an electric current through it, which helps to protect the metal against corrosion and makes it easier to adhere color. Scratches on the iPhone 5 are more noticeable because of the contrast between the outer color and underlying metal. The glass casing of the iPhone 4 and iPhone 4S made it less prone to scratches, though it was susceptible to cracks.