AAPL Apple Inc

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 for Apple to predict the number of components and phones it needs, people familiar with the situation said.

In recent weeks, Apple slashed production orders for all three of the iPhone models it unveiled in September, these people said, frustrating executives at Apple suppliers as well as workers who assemble the phones and their components.

Forecasts have been especially problematic for the iPhone XR, Apple's new lower-price model. 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 assemble 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's shares fell 4% Monday to $185.86, a drop that put them close to bear-market territory -- a decline of 20% or more from a recent peak. The stock is down 16% since Apple on Nov. 1 reported record quarterly revenue and profit but gave an outlook for the holiday quarter that didn't portend explosive growth.

Apple -- which doesn't give public forecasts for demand or production of its products -- 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 slowdown has rippled throughout Apple's supply chain.

Last week, big suppliers of iPhone components including Qorvo Inc., Lumentum Holdings Inc. and Japan Display Inc. cut their quarterly profit estimates, citing a reduction in previously placed orders from a large customer. Apple wasn't named, but it accounts for a third to half of revenue for these companies, according to financial filings and estimates.

Investors reacted by sending shares of the three companies sharply lower.

At Foxconn Technology Co., Apple's largest iPhone assembler, thousands of workers have voluntarily left its Chinese plants earlier than they intended after Foxconn cut overtime hours that typically are available during peak production periods, people familiar with the matter said. Many workers have come to rely on overtime as a major source of income. Foxconn declined to comment.

Hundreds of suppliers built their businesses on the back of the smartphone era, and none benefited more than those providing components for Apple. The iPhone's popularity generated tremendous revenue and profitability for suppliers, lifting their market valuations as components became the backbone of their business.

But 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. Apple also continues to sell some older models in its stores, further complicating forecasting.

Moreover, the addition of new iPhones at higher prices -- the devices now cost $749 to $1,099, up from $649 to $769 in 2016 -- has created uncertainty in how customers will respond, analysts and forecasting experts said.

"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."

The suppliers' ability to gauge demand will also be hurt by Apple's recent decision to stop reporting unit sales, one supplier said.

Sales of the iPhone XR could pick up later next year, mirroring what happened when Apple launched the lower-priced Phone 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 sales of new iPhone versions.

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 then-flagship iPhone X, which it later 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 remains a tremendous business for suppliers, most relied on the growth in iPhones sold to boost their profits. Apple tightly controls margins and asks many suppliers to make big investments in specialized machinery to make its products, suppliers said.

"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 through the higher iPhone prices and by focusing more on software and services. The strategy helped the company report its best-ever annual revenue and profit for the fiscal year ended in September; for the current quarter, it projects revenue of $89 billion to $93 billion.

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. Unlike Apple, they can't benefit from services and software and rely heavily on phone 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?"

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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 19:29 ET (00:29 GMT)

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