Apple’s Dual iPhone Strategy in Doubt; Company Cuts iPhone 5C Orders, Raising Concerns About Demand for Lower-Cost Device

Apple’s Dual iPhone Strategy in Doubt

Company Cuts iPhone 5C Orders, Raising Concerns About Demand for Lower-Cost Device

LORRAINE LUK, EVA DOU and IAN SHERR

Updated Oct. 16, 2013 7:13 p.m. ET

Apple Inc. AAPL +0.49% hoped to broaden its appeal with a cheaper version of theiPhone. But that effort appears to be faltering after a few weeks. The tech giant has reduced orders to assemblers for its lower-end iPhone, the 5C, people familiar with the situation said. At the same time, retailers and telecom operators report tepid demand for the device, prompting some to cut prices.The fact that the 5C appears to have missed Apple’s expectations may not be all bad, especially if it means consumers are buying more of the 5S, the higher-end iPhone that came out at the same time last month and sells for $100 more. Apple has increased this quarter’s orders for the iPhone 5S, said two executives at assembler Hon Hai Precision Industry Co. 2317.TW -0.41%

But it does signal that Apple misjudged with its strategy to introduce for the first time two new phone models simultaneously. Apple didn’t return requests for comment.

Gervais Pellissier, chief financial officer of French telecom company Orange SAORA.FR +2.65% , said the 5C isn’t selling as well as expected because it is too expensive, and the older iPhone 4S remains an attractive, cheaper option. Mr. Pellissier said the 5C is selling “much less” than the more expensive 5S model.

Likewise, employees at several Best BuyCo. BBY +2.41% stores across the eastern U.S. reported ample supplies of the 5C, but much thinner stockpiles of the 5S. An employee at one location estimated the 5S had outsold its cheaper sibling three-to-one.

Apple put its new phones on sale Sept. 18 amid growing challenges on both the high and low ends from rivals including South Korea’s Samsung Electronics Co. At the high end, Samsung last month showed the Galaxy Note 3, a large-display smartphone that sells for $700 or more. At the low end, Samsung offers smartphones in China for less than $100.

Investors had been pressuring Apple to respond to competition by offering a lower-priced smartphone to attract new buyers, especially those in China and other fast-growing emerging markets. Some analysts thought Apple might offer a phone with a retail price around $350.

But Apple chose a different path. The 5C is essentially last year’s iPhone 5, with a plastic backing that comes in a choice of five colors. It retails in the U.S. for $549, but can be had for $99 with a two-year contract.

Once the phones went on sale, consumer attention focused largely on the company’s high-end iPhone 5S, which offered a better camera, new motion-sensor technology and a fingerprint sensor. Demand for a gold-colored model was particularly high early on, prompting Apple to boost orders.

Today, Apple’s online stores in the U.S. and China promise to ship the iPhone 5C within 24 hours. But iPhone 5S orders take two to three weeks.

This month, Apple told its two assemblers, Taiwan-based Pegatron Corp. 4938.TW 0.00%and Hon Hai, that it would cut this quarter’s orders for the iPhone 5C, the people familiar with the situation said.

Pegatron, which analysts said assembles two-thirds of iPhone 5Cs, was told the order would be cut by less than 20%, a person familiar with the matter said. Hon Hai, which assembles the remaining 5Cs, was told the order would be cut by a third, two people familiar with the matter said.

An executive at Hon Hai, which is also known as Foxconn, said it stopped hiring additional workers to produce the iPhone 5C because of the reduced order. A Hon Hai executive last month said the company would beef up its workforce, anticipating strong orders for the iPhone 5C.

A component supplier was notified that the order for iPhone 5C parts would be cut by 50%, a person familiar with the matter said.

The reduced orders could indicate weak demand, or could signal that Apple wanted to ensure adequate supply of the 5C so that potential buyers, who were more likely to be switching from competing phones, didn’t have to walk out of a store empty-handed.

That may have been compounded by the choice of colors, and a need for retailers to have supplies of each.

“If you have people walking into an Apple Store who haven’t been there before and coming from an Android phone, you don’t want to disappoint them,” said Michael Levin, co-founder of market research firm Consumer Intelligence Research Partners.

In addition, Apple’s original forecasts may have included demand from customers of China Mobile Ltd. 0941.HK -0.82% , the country’s largest wireless network. Apple had been preparing to ship iPhone 5C’s to China Mobile, but the two companies haven’t disclosed a deal.

Still, the signs of weak demand reach around the globe. China Telecom Corp. this month cut its price for the 16-gigabyte iPhone 5C by 700 yuan ($115) to 3,788 yuan. Wal-Mart Stores Inc. last month said it would offer the 5C for $79 with a two-year contract, a discount of $20.

“It is of course not clear what ‘success’ is, but it is clear that a price reduction by retailers isn’t success, especially for Apple and especially this quickly,” said Rajeev Chand, a managing director at boutique investment bank Rutberg & Co. “My sense is that there is some demand but not as much as was expected.”

In China, an unsubsidized iPhone 5S costs the equivalent of $866, while an iPhone 5C costs $735.

Apple’s “high price point in China makes it difficult for the company to compete in the world’s largest mobile market by subscribers,” said Marvin Lo, an analyst at Mizuho Securities.

“Customers in more-developed markets like the U.S. and Hong Kong also prefer buying the iPhone 5S because of the little pricing difference between the two new iPhones,” Mr. Lo said.