Apple's battery replacement program affects 650 million iPhones made since the iPhone 6 in September 2014.
The battery replacement has been shown to also improve performance of the iPhones.
Apple's income will be impacted by the cost of the replacement batteries and by delays in purchases of newer phones, thereby impacting income of its supply chain.
Based on an average of 10 grams of cobalt, a key element in iPhone lithium ion batteries, the 650 million iPhones corresponds to 26% of all EVs sold in 2017.
Apple (AAPL) announced on December 28, 2017 that the company is reducing the price of an out-of-warranty iPhone battery replacement by $50 — from $79 to $29 — for anyone with an iPhone 6 or later whose battery needs to be replaced, available worldwide through December 2018.
The company later announced it would replace any battery, not just those that need to be replaced because of low battery life. Any iPhone 6 or later includes the iPhone 6, 6 Plus, 6s, 6s Plus, 7, 7 Plus, and iPhone SE, and all qualify for the $29 battery replacement.
The replacement is simple, as I discovered last week when my iPhone 6 battery died and I was a mile from an Apple store. The Apple Genius will test your phone, send you a Genius Bar Work Authorization by email, and tell you to stop back in a few weeks when the battery arrives. It takes about an hour and the owner can wait in the Apple Store or walk around the mall while it is being installed.
The iPhone 6 debuted in September 2014, which means any iPhone sold after that time could be replaced. What’s extremely important to owners is that the replacement is not only about improving battery life. Some tests have found replacing the battery can result in speed improvements of over 100 percent. According to IFIXIT:
“They not only got that missing 60% back, but they beat the Geekbench aggregate scores in every single test we ran. Some phones saw a consistent performance boost of over 100%—not just in benchmarks of course, but also in the snappiness of their response during day-to-day use."
Bottom line - and I reference a kitchen cabinet commercial we’ve all heard a thousand times - “Why replace when you can reface?”
In other words, my iPhone 6, which has lasted three years, should last another three years with a new battery that only costs $29. While I write about technology, I’m not really a technophile and really don’t care if my iPhone has face recognition and a full screen OLED display or not. Impact On Apple And Supply Chain
What does that mean for Apple? According to Table 1 below, from Q3 2014 when Apple introduced the iPhone 6 through Q3 2017 when the iPhone 8 was introduced, Apple sold 650 million phones. All qualify for a battery replacement.
Thus, Apple stands to lose money on up to 650 million replacement batteries, but could lose sales on new iPhones because a proportion of the owners of the 650 million updated iPhones sales won’t feel it necessary to buy a replacement phone. Figure 1
Display sales will be impacted. I discussed Apple’s iPhone display strategy in a December 8, 2017 Seeking Alpha article entitled “Apple Will Probably Stick With Its 2-Tier OLED/LCD Display Strategy For Next-Generation iPhones.” Besides displays from Samsung Electronics (OTC:SSNLF) and LG Display, I discuss the A-series processor from TSMC (TSM).
There will be a large impact on memory sales as the iPhone replacement cycle is disrupted. NAND and DRAM revenues for mobile applications represent 30% to 40% of the total market. I discussed the memory market in several Seeking Alpha articles, the most recent on January 11, 2018 entitled “Intel's Split Is Really Bad News For Micron Technology.” The article discussed the NAND joint relationship between Intel (INTC) and Micron Technology (MU).
Impact On The Electric Vehicle Battery Supply Chain
There is another industry that is monumentally impacted by the iPhone battery replacement program – the short-term spike in demand for critical cobalt and lithium as up to 650 million batteries need to be replaced. I say short term because Apple will undoubtedly recycle the replaced batteries at companies such as Umicore, American Manganese, or Retrieve.
How much of an impact? I discussed in an October 13, 2017 Seeking Alpha article entitled “How To Minimize Tesla's Cobalt Supply Chain Risk,” that Tesla's (TSLA) batteries, which contain chemical compounds of cobalt, are at risk from a shortage of cobalt because of high demand in lithium ion batteries.
Both lithium and cobalt are critical components of lithium ion batteries, and there are supply-demand dynamics that have been responsible for meteoric rises in prices of both metals. These issues are discussed in my article above. In this article, I focus only on cobalt.
According to The Information Network's report entitled "EV Batteries and Materials: Technology, Trends, and Market Forecasts,” Table 1 shows the amount of cobalt contained in a lithium ion battery by device.
There is an average of 1000 times more cobalt in an EV battery than in a smartphone. However, in 2017, only about 1.2 million electric cars were sold globally compared to 1.5 billion smartphones.
Table 2 presents my analysis of the impact of Apple’s battery replacement on the cobalt supply. I note above that about 650 million iPhones were manufactured that qualify for a battery replacement. Data are based on an average of 10 grams of cobalt per smartphone and 10,000 grams (10 kg) of cobalt per EV (Table 1).
Thus, 6.5 billion grams of cobalt were utilized for the smartphones. This number equates to 650,000 EVs. It should be noted that 65% of the global electric car sales in 2017 were pure electric. That means approximately 422,500 pure electric plug-in cars were sold.
However, only about 75% of these plug-in EVs cars were powered by batteries containing cobalt. The others were primarily cars manufactured in China containing Lithium Iron Phosphate (LFP) batteries having no cobalt. I refer the reader to my above article on TSLA. The 75% of EVs is calculated at 316,875 cobalt batteries, which represented 26% of the 1.2 million EV cars sold globally in 2017. Investor Takeaway
Apple’s iPhone battery replacement will impact its revenues on two levels – (1) cost of the replacement of as many as 650 million batteries and (2) lost sales of new iPhones since the older phones with a new battery would delay an upgrade.
Obviously, only a percentage of the owners of qualifying iPhones will opt to replace the batteries. But for owners without a WOW factor mentality, a $29 investment to delay by several years a $1,000 upgrade is worth the cost.
Apple will also impact revenues of its supply chain with this delay in upgrades. Companies greatly impacted would be Samsung Electronics (display and memory), Micron Technology (memory), and TSMC (processor).
Finally, the replacement of the batteries will have a short-term effect on cobalt supply. This is not a trivial issue in light of the meteoric rise in cobalt prices, as shown in Figure 2. This can equate to as high as 26% of all EVs sold in 2017. For smartphones, the 650 million batteries represents 43% of the 1.53 billion smartphones sold in 2017. Figure 2
The anticipated rise in cobalt prices, as up to an additional 6.5 billion grams or 6,500 metric tonnes need to be mined, will have a tremendous impact on cobalt mines. You can learn more about cobalt mining stocks here. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
CLA Price at posting:
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