Apple's Mixed Tech Strategy Created an Unexpected Crisis - The UpStream

Over the past 3 generations of handsets, Apple has had a 2-model strategy: a standard and larger screen variant of the same hardware. Other than the screen size, the only other major difference between the two models is the quality of the camera. Both models have come out at the same time, with the same general availability, meaning that neither truly cannibalized sales of the other.

This year, however, Apple took a different path: announcing three models across two generations of hardware. First is the iPhone 8 and iPhone 8 Plus. These devices are minor updates to the iPhone 7 and 7 Plus, and would probably be better named the iPhone 7S and iPhone 7S Plus. Second is the iPhone X, the first true redesign of the iPhone in its history.

While they might have announced both generations together, they did not release them together. The iPhone 8 series became available for preorder on October 15, 2017, with general availability on October 22, 2017. The iPhone X, however, will become available for preorder 6 weeks later, on October 27, 2017, with general availability on November 3, 2017. This staggered release schedule, combined with such extremely different hardware, has caused some sales issues for Apple.

iPhone 8 and iPhone 8 Plus

These devices are, as we have come to expect, incremental upgrades to the existing line of products. Customers seem to have noticed this, and could potentially be skipping the product line entirely. A number of publications, including ours, have spoken with sales representatives from wireless retailers about the sales numbers for the new iPhone line, and it has not been positive. Many stores reported few people on launch day waiting for the devices.

The minor incremental upgrade could be to blame, but it could also be the price difference between the iPhone 7 and iPhone 8 for the small change in features. Reports suggest that iPhone 7 sales have actually eclipsed iPhone 8 sales for the quarter. A marginally better camera does not justify a $150 price increase for many consumers.

In addition to the lack of excitement surrounding the iPhone 8, there is the issue caused by the delayed release of the iPhone X. Many customers want to interact with a device before they buy it, and with the major redesign of the iPhone X, people could be waiting to hold both devices to decide whether to go with the iPhone X or iPhone 8.

The CEO of Rogers Communications, the largest wireless telecom in Canada, has described sales of the iPhone 8 as "anemic," a very descriptive word. The CFO of Verizon Communication said that phone upgrades as a whole have been down because of a lack demand for the iPhone 8, but is hoping for a surge at iPhone X time.

I think what you're seeing there is a difference in timing of some of the new devices coming out versus what we've historically seen.

As we get into the holiday season, some of those new devices come out, we think we will see strong demand.

iPhone X

Those waiting to touch the iPhone X before deciding might have another problem on their hands: a lack of devices. It is possible that Apple made a mistake in which devices would be more popular, focusing their manufacturing efforts on the iPhone 8 series, and not so much on the iPhone X. In fact, reports suggest that, after preorder quantities are exhausted on October 27, there will be no more devices until 2018. Some reports suggest that they might be fulfilling preorders until quarter 2 of 2018.

Ming-Chi Kuo, an analyst for KGI Securities, and arguably the top Apple analyst in the world, has written that a combination of rare materials and a lack of manufacturers who are capable of producing certain required parts are the biggest limiting factor for Apple's production.

Special materials, recipes, design, processes, equipments and tests are required for antenna FPCB, as the specifications for iPhone X antenna (supplied by Amphenol (US)) are higher than those of iPhone 8 and only Murata (JP) and Career Tech (6153 TT, NT$30.1, NR) can meet Apple's requirements. Murata (originally with a 60% order allocation or higher) won't be able to resolve its issues before 2Q18, and thus has been fully replaced by second supplier Career. We believe Career will ramp up in November, as capacity expansion takes time, and its materials, recipes, design, processes, equipments and tests are different from those of Murata.

Combining this with previous issues, like the TrueDepth camera, could make getting an iPhone X nearly impossible.