Apple Is Playing It Safe This Year With iPhone Production

Last year, there were numerous reports that Apple (NASDAQ: AAPL) had reduced its orders for iPhone X in the months following the flagship’s launch, which suggested that demand for the smartphone may not have been as strong as anticipated. At the same time, CEO Tim Cook has cautioned investors not to read too deeply into supply chain reports, once saying that individual data points (if even accurate) are “not a great proxy for what’s going on.”

That being said, let’s overthink the latest media report about component order cuts, which caused Apple shares to fall modestly in trading today.

iPhone X suffered from production delays last year. Image source: Apple.

Lowered expectations

Nikkei Asian Review reports that Apple is telling suppliers to expect 20% fewer component orders for the iPhones that it plans to launch within a matter of months, citing supply-chain sources. Those sources say that Apple is taking a more “conservative” approach this time around, after having to adjust orders for various components destined for iPhone X. For example, Apple reportedly reduced its orders for OLED displays from Samsung in February, which led the South Korean conglomerate to try to find new customers for those panels, as Samsung had already heavily invested in production capacity.

“The scheduled time frame for components for the OLED models to go into iPhone assemblers like Foxconn and Pegatron for final assembly falls in July, while the schedule for components for the LCD model would be in August,” Nikkei‘s anonymous source said. “Two OLED models are likely to be ready roughly one month earlier than the cost-effective LCD model, according to the current plan.”

During the last product cycle, Apple had its supply chain ready to produce 100 million units combined of the three models it launched (iPhone X, iPhone 8, and iPhone 8 Plus). Apple is again expected to launch another three models for 2018, but is now only targeting 80 million units, according to the report. Apple sold nearly 130 million iPhones in the fourth and first quarters combined, although that includes all iPhone models and Apple does not disclose product mix. The Mac maker did address demand fears by noting that iPhone X has been the most popular model every week since launch.

Apple is expected to integrate its TrueDepth camera system, which enables 3D sensing and 3D facial recognition, across the lineup — even the LCD model. That would follow Apple’s typical practice of proliferating new technologies across its product portfolio after introducing the new technology in a flagship device.

As always, it’s hard to decipher what a supply-chain report means for Apple’s business. Apple has significant flexibility with modifying its orders throughout its supply chain, including both increases and decreases depending on market conditions and product demand. The company could very well just be taking a more conservative approach this year. Moreover, unit sales are just part of the equation; Apple was able to post a 13% jump in iPhone revenue in the fourth quarter, even though unit sales declined by 1%.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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