Apple Inc.'s 2018 iPhone Production Plans Look Modest

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According to analysts with RBC Capital (via Investors Business Daily), citing supply chain checks, Apple (NASDAQ: AAPL) is planning to manufacture 80 million to 90 million of its next-generation iPhone models during the second half of 2018. This figure, the RBC analysts say, represents a reduction from the between 100 million and 120 million new iPhone models that Apple had built ahead of the start of the current product cycle, which began in September 2017.

"Compared to the very optimistic expectation for iPhone 8/X sell-through, supply chain partners are managing their inventories," the analysts said.

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Let's go over what this means for Apple's business.

Calibrating expectations

Even companies like Apple, that have some of the industry's best minds working for them, can't, with perfect accuracy, predict how a given product cycle is going to go. The best they can do is look at how well the current product cycle is going, try to estimate how the overall market is going to look, and then try to take a crack at figuring out how competitive the upcoming lineup looks to guess at any potential market share shifts.

Based on what the RBC analysts said, coupled with all of the predictions and supply chain checks that were published by analysts ahead of the current product cycle, it's clear that Apple expected big things from the current product cycle, but demand came up short.

There's been a lot of chatter about how Apple's flagship model, the iPhone X, sold well below expectations. In fact, DigiTimes recently said, citing supply chain sources, that Apple had originally planned to buy 40 million OLED display panels (Apple uses such panels exclusively in the iPhone X) during the first half of 2018 but ratcheted down its purchase intent to just 25 million units.

That report from DigiTimes is consistent with an earlier report that Apple had cut its OLED display panel orders from 40 million units during the first quarter of 2018 to just 20 million. Given that this product cycle hasn't quite played out as Apple had hoped, it's not surprising for Apple to give its suppliers more muted demand signals for the coming iPhone lineup.

What this means for Apple

The initial build rates only tell us Apple's expectations for peak demand for its iPhone models, and it's clear that the company's expectations for this cycle's peak were lower than its expectations for the current cycle's peak before the cycle began. If you're worried that this means Apple is planning for iPhone unit shipments to decline year over year in the coming product cycle -- don't! It just indicates that Apple's expectations for peak iPhone sales in the coming cycle are lower than they were ahead of the prior cycle, which, again, were likely much higher than reality as Apple reportedly significantly cut production mid-cycle.

Additionally, if you're worried that this means Apple's production will fall short of demand, this is probably a legitimate concern. If iPhone demand grows substantially year over year in the coming product cycle, then Apple could end up supply constrained for a little while.

However, this isn't something that'd permanently impact sales during the product cycle -- if demand for the new products is strong and Apple can't satisfy that demand in the peak quarter, then the odds are reasonable that most of the customers who couldn't get their hands on the new iPhone models at first will just wait a little longer until Apple can catch up with demand.

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Ashraf Eassa has no position in any of the stocks mentioned. 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.