Apple 2016 iPhone Sales To Fall For The First Time Due To "Lukewarm Demand", Shipments To Drop 8.6%

Another day, another warning about slowing demand for Apple products, this time once again out of Japan's Nikkei (which in recent months has been quite vocal in its cautions about a substantial cliff in AAPL growth), which moments ago warned that Apple will see the first annual decline in iPhone shipments this year since the smartphone's debut in 2007 "due to lukewarm demand for a new model, people familiar with the matter told Nikkei Asian Review."

As Nikkei reports citing a person at a major supplier, overall iPhone shipments will total 210 to 220 million this year, falling as much as 8.6% from 2015.

"Hon Hai Precision Industry Chairman Terry Gou has told his staff that the demand for iPhones will remain feeble until at least early next year," a source said. Hon Hai, better known as Foxconn Technology Group, declined to comment. Gou told Chinese Premier Li Keqiang in China in late May that the company's overall orders were falling this year, although Foxconn did receive a sudden rush of orders in April and May. Foxconn makes about 70% of iPhones sold globally.

Foxconn reported that its revenue fell 5.5% year-on-year in the January-May period. Apple also reported its first sales decline in 13 years in the quarter ended in March, and forecast another drop in the current quarter.

Sources said that iPhone 7, the newest, lacked innovation, although the 5.5-inch model would feature dual lens, which offers a more powerful zoom.

Jeff Pu of Yuanta Investment Consulting estimated in a May report that total iPhone production this year would fall 12% year-on-year to 207 million units due to weak sales of iPhone 6s and 6s Plus.

The biggest problem for Apple? The same catalyst that sent the stock soaring in the past few years, only to drag it lower now - China.

Apple's troubles are further exacerbated by growing challenges it faces in the slowing Chinese economy, a key market accounting for about 25% of its sales.

 

Suppliers said that a perceived change of strategy at Apple was also causing them problems. A source at a major supplier said that Apple's current strategy of selling different colored iPhones has led to an inventory build-up for suppliers, compared with simpler color schemes and lower costs previously.

Actually it's not just China - the complete lack of innovation is also troubling: "Apple's resorting to colors instead of pursuing innovative features to boost sales shows that the company now has no way of breaking out of the current doldrums," the source said.

Apple's tendency to place extra orders also hurts suppliers. "Apple is always overbooking its capacity. It works only when demand is strong. However, when demand softens, it leads to inventory correction for all the suppliers," said Lin Chien-nan, president of Wintek, a former major touch module supplier to Apple. WinTek filed for restructuring in late 2014 after expanding aggressively.

"There is no concrete contract between suppliers and Apple. Apple never signs a contract with a fixed price and guaranteed orders," said Lin, "The orders are dynamic and could be adjusted every quarter."

Meanwhile, expect Apple to issue even more bonds and use the proceeds to buyback stock as it is nowjust another, unimaginative, run-off-the-mill company besieged by bankers with ideas of "financial innovation." Expect its multiple to reflect as much.