By Yoko Kubota in Beijing, Takashi Mochizuki in Tokyo and Tripp Mickle in San Francisco
Lower-than-expected demand for Apple Inc.'s new iPhones and the
company's decision to offer more models have created turmoil along
its supply chain and made it harder to predict the number of
components and handsets it needs, people familiar with the
situation say.
In recent weeks, Apple slashed production orders for all three
of the iPhone models that it unveiled in September, these people
said, frustrating executives at Apple suppliers as well as workers
who assemble the handsets and their components.
Forecasts have been especially problematic in the case of the
iPhone XR. Around late October, Apple slashed its production plan
by up to a third of the approximately 70 million units it had asked
some suppliers to produce between September and February, people
familiar with the matter said.
And in the past week, Apple told several suppliers that it cut
its production plan again for the iPhone XR, some of the people
said Monday, as Apple battles a maturing smartphone market and
stiff competition from Chinese producers.
Apple shares fell 3.5% to $186.78 in afternoon trading, a drop
that puts them in danger of entering bear-market territory. The
stock has taken repeated hits since Nov. 1, when Apple reported
record quarterly revenue and profit but gave an outlook for the
holiday quarter that didn't portend explosive growth.
Apple declined to comment.
During an interview earlier this year with The Wall Street
Journal, Apple Chief Financial Officer Luca Maestri said that
trying to determine demand for its devices based on reports from
suppliers can be misleading because the suppliers also make
products for competitors.
The fallout has rippled through Apple's supply chain.
Last week, major iPhone suppliers including Qorvo Inc., Lumentum
Holdings Inc. and Japan Display Inc. cut quarterly profit
estimates, citing a reduction in previously placed orders from a
large customer.
Apple wasn't named, but the iPhone maker accounts for a third to
half of revenue for these companies, according to filings and
estimates.
Investors reacted by sending shares of the three companies
sharply lower.
At Foxconn Technology Co., Apple's largest assembler of iPhones
in China, thousands of workers have voluntarily left earlier than
they intended to after Foxconn cut overtime hours that are
typically available during peak production periods, people familiar
with the matter said. Many workers have come to rely on overtime as
a key source of income. Foxconn declined to comment.
Hundreds of suppliers built their business on the back of the
smartphone era, and none benefited more than those supplying
components for Apple. The iPhone's popularity generated tremendous
revenue and profitability for suppliers of its components, lifting
their valuations and becoming the backbone of their business.
Still, the iPhone production cuts have reignited frustration
among suppliers and raised worries about Apple's ability to
forecast demand since it started releasing three flagship models
instead of two last year, according to executives at Apple
suppliers.
The suppliers' ability to gauge demand will also be hurt by
Apple's recent decision to stop reporting unit sales, one supplier
said.
The addition of new iPhones at higher prices -- the devices now
cost $749 to $1,000, up from $649 to $769 in 2016 -- has made
predicting demand more difficult, analysts and forecasting experts
say.
Apple is also selling some older models in its stores,
complicating forecasting further.
"The more choice you introduce, the harder it is to pinpoint who
will buy what," said Steven Haines, chief executive of Sequent
Learning Networks, which has advised companies such as FedEx Corp.
and Verizon Communications Inc. on product management.
In the past, Apple thrived on "the beauty of simplicity," said
an executive at an Apple supplier. "It was very few models at
massive volumes."
Sales of the iPhone XR could pick up later next year, mirroring
what happened when Apple launched the iPhone 5C in 2013, said Ben
Bajarin, a technology analyst with Creative Strategies. He said
that because those devices have fewer features than the
higher-priced flagship models launched around the same time, they
appeal less to tech's early adopters who fuel initial iPhone
sales.
The company's suppliers have been rattled before. The iPhone 6,
introduced in 2014, sold better than Apple's expectations and
suppliers scrambled to meet increased orders. The following year,
demand for the iPhone 6s fell short of forecasts, leaving suppliers
to grapple with excess inventories and underused production
capacity.
Last year, many suppliers were hurt by Apple's excessively
optimistic initial production forecast for the iPhone X, which it
then slashed by some 20 million units for the first three months of
2018.
"Doing business with Apple is very risky as it often reverses
what it has promised," said an executive with a supplier.
Supplier frustrations have been compounded by the lack of growth
in iPhone unit sales in recent years. Since peaking in fiscal 2015,
the number of iPhones sold annually has fallen 6% to 217.7 million
units.
While making components for 200 million-plus iPhones is still
tremendous business for suppliers, most relied on the growth in
iPhones sold to increase their profits. Apple tightly controls
margins and asks many suppliers to make big investments in
specialized machinery to make its products, suppliers say.
"Growth fixes a lot of sins," the executive at an Apple supplier
said. "When it slows, rocks start to show up in the bottom of the
ocean."
Apple has offset slowing growth by raising iPhone prices and
focusing more on software and services. The strategy helped the
company report its best-ever year of revenue and profit for the
fiscal year ended in September; for the current quarter, it
projects revenue of $89 billion to $93 billion. Its growing
services business has also offset the company's contracting
hardware margins, industry analysts say.
But while Apple has been enjoying record revenue and profit for
the past year, the same can't be said for many of its suppliers.
That is because unlike Apple, they can't benefit from services and
software and they rely heavily on handset volumes, suppliers and
analysts say.
"The freeway of Apple suppliers is littered with roadkill," said
Timothy Arcuri, an analyst with investment bank UBS who tracks the
iPhone supply chain. "That's one thing when units are growing and
another when units aren't going to grow. There's an argument to be
made now: Why take the risk?"
--
Yang Jie
in Beijing contributed to this article.
Write to Yoko Kubota at yoko.kubota@wsj.com, Takashi Mochizuki
at takashi.mochizuki@wsj.com and Tripp Mickle at
Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
November 19, 2018 14:36 ET (19:36 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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