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Apple Inc. Set to Slash iPhone 8 Production

Ashraf Eassa, The Motley Fool

According to generally reliable KGI Securities analyst Ming-Chi Kuo (via MacRumors), Apple (NASDAQ: AAPL) is set to reduce the production of the iPhone 8, which first went up for sale on Sept. 22, by between 50% and 60% in the current quarter.

The production cut, Kuo says, is due to "fewer major selling points" and a "consumer preference for iPhone 8 Plus" given the mere $100 price difference between the iPhone 8 and the iPhone 8 Plus.

Apple marketing chief Phil Schiller standing on stage with an image of the iPhone X projected behind him.

Apple marketing chief Phil Schiller. Image source: Apple.

Fortunately, though Kuo says that while iPhone 8 demand isn't as strong as Apple had hoped, does have some good news for Apple investors.

First, the larger iPhone 8 Plus is apparently selling a bit better than expected (something that Apple CEO Tim Cook confirmed on the company's Nov. 2 earnings conference call). Additionally, Kuo thinks that Apple is going to ratchet up iPhone X production by 35%-40% in the current quarter to help reach supply-demand balance for the company's latest iPhone.

Here's what this means for Apple investors.

Mix shift for the win

At this point, it's probably safe to say that iPhone buyers opting to pick one of the three new iPhone models (rather than, say, a discounted older-generation model) are overwhelmingly flocking to either the iPhone 8 Plus or the iPhone X.

That trend -- should it continue through the remainder of Apple's current product cycle -- is unequivocally positive for Apple. It means that potential iPhone customers are willing to pay more for innovative new features.

The iPhone 8 starts at $699, the iPhone 8 Plus begins at $799, and the iPhone X will run you at least $999.

A silver iPhone 8 Plus on the left, and a gold iPhone 8 on the right.

Image source: Apple.

The iPhone 8 Plus distances itself from the standard iPhone 8 by including both a sharper display as well as a dual-lens camera system. The iPhone X has an even better camera system than the one found on the iPhone 8 Plus, an organic light-emitting diode (OLED) display, a high screen-to-body ratio, and a 3D-sensing front-facing camera called the TrueDepth camera.

This phenomenon isn't surprising

There has been much said about the elongation of the smartphone upgrade cycle. Instead of upgrading every two years, customers may be upgrading at a rate of, say, every three years.

The lengthening of the upgrade cycle is obviously negative for device makers, since it means that it becomes harder to keep smartphone unit shipments flat year over year, let alone growing.

The silver lining is this: Since individuals seem to keep their smartphones for longer, they may be increasingly willing to buy better, more expensive devices because they know that they ultimately plan to get more out of those devices.

Apple's iPhone X.

Image source: Apple.

iPhone revenue growth can come from some combination of unit shipment growth and average selling price growth, and as the smartphone market matures, the revenue growth opportunity should come increasingly from potential average selling price growth.

It's probably smart, then, for Apple to continue to focus on putting out higher-priced devices (with commensurately higher-end features) rather than to try to focus on cutting the costs of its flagship devices.

That's not to say that Apple shouldn't also try to effectively address lower price points -- it's doing so quite effectively with cost-reduced versions of its older-generation iPhones. But the focus at Apple ultimately needs to be on developing premium devices that are so compelling that customers will pay a bit more because they feel they're getting a lot more.

More From The Motley Fool

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.

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