Apple's Future Is In Plastics?

Forbes

If you've been tuning in to any source of financial news and stock information, you are probably aware that  Apple(AAPL) shares have come under pressure following talk of iPhone 5 production cuts.

As I remarked yesterday, it sure seems that the once darling of Wall Street is now the proverbial redheaded stepchild. Not only is it funny to me how fast the sentiment toward Apple has changed in the last several months, but despite that shift speculation continues to run rampant over what the next product set might be.

A few days ago the Wall Street Journal dished that Apple was working on a lower end iPhone, which would resemble the standard iPhone but would have a less expensive body. While many are pointing the finger toward the number of lower-tier Google (GOOG) Android-powered devices from the likes of Samsung, LG, HTC, and others hitting the market as the culprit, the data shows that a number of markets have high smartphone penetration levels, particularly in the U.S. and Western Europe.

That means in those markets the people who most likely want or can afford to shell out the bucks for a smartphone have probably purchased one. Incremental adoption will therefore come from those people who hold that price is a greater factor than the wow factor. In other words, lower-tier smartphones are not just for the emerging markets. Heck, if we look at Tiffany’s (TIF) announcement the other day that holiday jewelry sales slowed “markedly.” More specifically, comparable store sales over the holiday selling season were flat in all geographies, except for China. To ensure we are on the same page, a “low-tier smartphone” is one that carries a price point below $100.

As the saying goes, we’ve seen this movie before with a number of consumer electronic products - TVs, VCRs, DVD players and so on. And while that is good for the consumer, it tends to result in margin pressure across the supply chain as the vendor needs to trim costs in order to maintain their margins. The company that can be very profitable on the low-end is the exception and in some respects that was one of the differentiating factors for Nokia (NOK) before the mobile phone industry transitioned to smartphones.

Will Apple introduce a low-tier iPhone? It seems against the company’s historical strategy to go chase market share for the sake of market share. However, if we look at the iPod business, Apple has done a very good job of offering alternative products -- form factors and capabilities -- at varying price points. Also too, we now have not only the iPad but also the iPad mini -- similar capabilities but smaller form factor. One thing to remember is the size of the device dictates the size of the screen -- more or less -- and the screen is one of the costlier components of the device.

Perhaps the language associated with an new or additional iPhone model -- a “cheap” iPhone -- is missing the target. Rather, it seems Apple could offer a “value-oriented” iPhone. Mincing words perhaps, but when has Apple ever offered a product the consumer would consider “cheap”?

Adding fuel to the notion of a “value-oriented” iPhone, DigitTimes is out with “news” that Apple may source a plastic casing from a U.S. electronic manufacturing service (EMS) provider rather than one comprised of aluminum and glass. For those unfamiliar with the EMS space players include Flextronics (FLEX), Celestica (CLS), Jabil (JBL), Benchmark Electronics (BHE) and Sanmina (SANM) among others. Apple’s used a plastic polycarbonate housing in its iPhones before -- the 3G and 3GS models -- so such a design would not be unheard of. But again, the question is what the form factor and capability set would be for any potential new device. If Apple were to offer a iPhone model that returns to a plastic housing, that could boost demand for plastic suppliers such as Eastman Chemical (EMN), Dow Chemical (DOW) and Cytec Industries (CYT), to name a few.

On the other hand, it is possible that all of this is a tad overblown. My holiday mall walks showed strong traffic and shopping bag conversion at a number of stores and I was not alone in observing that. Also too, Apple has staggered its global roll out of the iPhone 5 as well as the iPad mini. Even though the Wi-Fi versions of the iPad mini and fourth- generation iPad went on sale on December 7 in China, the cellular versions of those two products will go on sale in China on January 18.

All of this makes for great speculation and we’ll have a better view on all of this when Apple reports its quarterly results on January 23. For those keeping track, according to Thomson One, current consensus expectations for Apple’s 4Q 2012 results call for $13.35 per share in earnings on $54.7 billion in revenues.

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