iPhone Production Rumors Swirl

Apple’s (AAPL) iPhone is on sale in 23 countries. In the first 72 hours, more than one million units sold. August 22, around twenty more countries are expected to come online.   
So the question is: how many units does Apple need to manufacture to keep ahead of demand and to satisfy a three to six week channel inventory need?

The initial reports, and early analyst expectations, seemed to set the answer at about 25 million units. A report from tech blog Tech Crunch speculated Monday the number could be much higher.

Citing a person “close to Apple” who has “direct knowledge of the numbers,” Tech Crunch reported that Foxconn, the Taiwanese manufacturer assembling the phones, has ramped up production to 800k units of the 3G phone per week.

Annualized, that level of production would amount to more than 40 million phones… though that presumes the report’s sources are i. accurate and then, that ii. the production rate stays above that level consistently and is not merely a short term production burst.

Odds this Applevine rumor is accurate? Probably 50-50 on this one.

With a wider global roll out of the phone expected this month and throughout the year, the prospect of a production ramp-up is not unrealistic. That’s especially true if the production increase is a short term move aimed at shoring up supply.  Where things get shaky are the precise number and also, ancillary rumors that have popped up around the Tech Crunch report; specifically, speculation the production rate would remain at or above that level. The biggest reason for the uncertainty is production capacity. While confirmed numbers are not available, some sources (including the Tech Crunch report itself) say 800k units a week exceed Foxconn’s peak production capacity. (And that capacity was expanded already. In June of 2007, Foxconn (Han Hai) Chairman Samuel Chin announced plans to spend significantly to double production capacity.)

Speaking of suspect iPhone rumors – another one is floating around that goes well into the improbable zone: The UK’s Daily Mail is reporting Apple is “about to launch” a Nano version of the iPhone and that it could be in shops in time for the holidays.

Anything is possible on the Applevine but the odds of an iPhone Nano seem especially slim. Apple is still rolling out the iPhone 3G and carriers around the world are subsidizing the prices to make the phone affordable. A Nano iPhone would risk undercutting those offerings and create a clear channel conflict. It’s difficult to see carriers, or Apple, rushing to do that anytime soon.

Rumors of a Nano-phone or even a clam shell iPhone have persisted for months and even been fueled by patent filings for two-sided devices. Every few months the rumors seem to reappear. At some point, possibly in 2009, the nano-phone could well become a reality. Now just doesn’t seem like the time.

The big product changes in Apple’s near future are much more likely to be the recently rumored upgrades to the Macbook notebooks.

Comments

[mollytjm]

since apple is the most innovative company on the planet, it's going to keep coming up with fantastic products...and...they'... upped their spending on R & D. i'm waiting for them to make a true pocket book sized computer/phone/plus...... sure it's coming. in the meantime, let's hope some of the completely wonderful apple news reaches the stock market:)

[Jon T]

The Daily Mail nano rumour is a feed from Windows Mobile at MSFT - a feeble attempt to slow or delay the adoption rate of the iPhone...

I personally think the 800k per week is close to true. After all there are still people waiting in line almost a month after it launched..

[Brewer]

Good article. Demand appears to be pretty phenomenal so far. I am seeing a lot of them in use already, and a friend is now waiting for one (10-20 days wait) at an AT&T store). He was waiting for his contract to expire anyhow. A lot of people are waiting on a contract to expire, and the iPhone is a clear choice because it's the only phone that rivals a laptop.

[FreeRange]

Thank you for stating that these are rumors, and especially with the iPhone Nano, one of very low probability. Agreed it would make no sense at this time as it would conflict with the tremendous sales of the new 3G iPhone. Some of your colleagues at other media outlets have not been so "insightful" in their "reporting" and have just picked up the rumors as pretty much fact.

[Constable Odo]

An iPhone Nano makes no sense. Why would Apple be going after the common handset business. Smartphones I can understand, but a Nano they Apple will charge $100 - $150 for. I hope Apple doesn't pursue this price range. Leave it to Nokia or Samsung. People will easily buy Apple smartphones in the $300 up range, so why bother with cheapster handsets.

I say Apple will not introduce a Nano and this only a foolish rumor.

As for Foxconn producing 800,000 iPhone units a week, I doubt they can keep that up for long. Maybe they'll run that burst for a month, but that's about it. Too hard on employees to run above full capacity for any length of time. Even if I'm the biggest Apple fan going, there is no way Apple can sell 20 million iPhones this year, so there's no point in manufacturing that many iPhones for the remaining months in this year. No way with China and Russia sitting on the sidelines as mere spectators.

[Tardis]

I do not know how Apple's production contracts work, and anyone who does will not be talking to you, but I would guess they are based on production over an 8-hour or 12-hour working day. If this has been increased to produce new kit at 800k/wk, and this has been achieved by expensive 24/7 shifts, rather than increasing production capacity, they may be also working on increasing production capacity.

Here in Japan, the message I am getting from Softbank is that "we cannot even consider how to handle your family plan or number portability transfer from your previous carrier right now, let alone tell you how much this will cost, so sometime in September is a good guess".

Anyway, there is no reason to believe anything of the Daily Mail speculation about another rumoured iPhone. There is every reason to believe that Apple may be struggling to meet demand for new 3G iPhones. If Apple is meeting that demand by producing new iPhones on 12 or 24-hour overtime, once demand slows we can expect the result to be somewhat less than the 40 million iPhones predicted, but of course still probably more than the 10 million iPhones previously regarded as an ambitious target.

[jmmx]

@ Tardis

I pretty much agree with you except for one thing: Demand is NOT going to slow! Not for a long time. On Aug 22 there will be 20 new countries added, and (so they say) China by the end of the year, then into Christmas season.....

Everything is blowing away Apple's own internal expectations. All i seem to hear is that they still are not really keeping up with present demand.

Cool!

[jocca]

I have been using the Chinese characters input on version 2.0 of the iPhone and this great feature is going to be the hottest selling point for the Chinese and the Japanese too. I will expect Apple to move a lot of those in that market.

[jmmx]

Look at the stock price! Sure the whole market is up, but Apple seldom moves 4+%.

Maybe people are doing the math:
800,000/week = 3.4M / month X 6 months = 21 M
21 M x $500 x 20% Net margin (conservative) = 2+ B profit
2.1 B / 900,000 = 2.33 EPS
oops - that is 2 quarters
so $1.16 EPS / Quarter

--
Of course this gets spread out over 6 quarters but still - it is money in the bank. It is EARNED, just deferred.

Now think of the halo effect....

[KenC]

Let me point out that the rumor of 800k iPhone 3Gs a week started, oh, way back in mid-to-early June. There was a report in Barrons picked up by Henry Blodget.

If you recall, there was a "negative" report spun that said production of the iPhone had been "slashed", 16% from the original 3rdQ order of 12M, which results in 10.2M. Of course, if you do the math, that's about 800k phones a week. If you add a runrate of 12M for the 4thQ, that's 22.2M iPhone 3Gs ordered for 2008. Add in the 2M EDGE iPhones and that's about 24M iPhones in 2008. Of course, they won't all be sold this year, but still, that's over double the oft-quoted target of Steve Jobs for 10M in 2008.

[Sekar]

Gosh, iPhone users tend to forget past history very quickly. Slow down guys and look back just four years ago. Foxconn and Motorola were doing the same ramp up for Razr and here we are in 2008 repeating the same mistake. AT&T and Verizon literally slammed Motorola by reducing Razr's cost and making it a cheap commodity. AT&T can still do this to iPhone by arm twisting Apple - they have managed to give away iPhone for $199 which many Apple fans thought was impossible. Apple is a new player in mobile phone market. Apple is a great company to produce the iPhone, but has very little experience in handling such massive worldwide launches. Companies like Microsoft, Dell, Sony and IBM have burnt badly with production problems. Most notably Xbox 360, PS3, Sony batteries and Dell Laptops. The weakest link in this production chain is Quality control with Chinese/ Taiwanese assemblers. One small problem and the entire lot will have to be recalled. Apple is yet to experience the kind of production problems that other competitors have faced - they still had Macbook battery recall in 2006. Also Steve Jobs forecast of 10 Million iPhones made last year was way off. Apple had to drastically cut down the price to boost sales and now introduced 3G in less than a year. All these developments weren't taken into consideration while making 10 million forecast. So let's be cautious in giving Apple all the benefits of a great iPhone launch.

[chiller]

Whatever happen to the rumors of Steve Jobs not looking well? Why is everyone focusing on unimportant rumors like Apple increasing iphone production and high demand when? People have such a short memory.

[JosephKr]

OK, for the skeptics out there, let's redo the math a bit and come to some conclusions (hopefully).
800K phones per week for these last 26 weeks of the year would equal 20.8 million phones. Let's assume that they make that goal. The range for carrier payment has been from $350 to $500 each. Let's assume just $300. That gives $6.24 BILLION. Assume only a 30% margin, and you have close to an extra $1.9 BILLION in net profit over the next 2 quarters.
Can Apple sell that many phones? As of August 22, there will be 70 countries in the fold selling the phones. Take off the 3 weeks between now and August 22, and that leaves 23 weeks. 800K by 70 countries gives less than 12,000 phones per country per week. I think this is more than achievable, especially if the pundits are correct and Apple's handset share will be only a few percentage points. If anything, Apple ought to be out there figuring out how to find a secondary manufacturer!
As for the stock price, it's been manipulated artificially low. Today it showed some rebound and I expect that it will surge towards $180 to $185 by this time next week.

[JosephKr]

Steve is just fine. So let's not try to artificially muddy the waters with nonsense arguments to try to worry folks about things that really don't mean squat as far as hard numbers are concerned.
Also, for those worried about perfection, you can be sure that some percentage of hpones will have problems. Big deal. It happens with every manufacturer and every handset and should not be taken as an end of the world scenario just because it's Apple and Apple is supposed to be perfect.
Honestly people!

[reagan]

20 to 25 points higher by next week? I don't think so.

[tuskagee]

Look for clowns like Savitz and theStreet.com to start creating all sorts of fanciful hybrids and unrealistic expectations. That way, they can set the stock up for disappointment around Xmas and get their short money. Thestreet.com has NO BUSINESS WHATSOEVER rating cellphones via that creature Krakow other than attempting to trash the iPhone, the inception of these 'reviews' interestingly coincided with the iPhone launch. Learn more about Cramer and theStreet et al at RoughlyDrafted.com. SEC?

[KenC]

Uhm, Sekar, how do YOU know that Steve Jobs didn't know that the iPhone would get cheaper over time, or that 3G was coming, when he made his 10M iPhone prediction?

Did you listen to his original presentation at the WWDC07? He specifically states that 3G is coming. And, the iPhone isn't cheaper, Apple gets even more now than before. It may appear to be cheaper, but Apple is getting anywhere from $400 to $600 per phone depending upon who you ask.

[BS Detector]

Just a data point - when I was at the Pentagon City Apple store last Friday between 10:30 and 11:30, there was a line of people outside waiting to buy iPhones. What's that, three weeks after release?

[ValueInvestor]

Who cares? The iPhone is a hyped up product like all apple products. You can get the equivalent product much cheaper elsewhere. Apple has mastered their marketing tactics.