Apple cutting wholesale iPhone prices in China - 01-10-19
Apple (AAPL) is not known as a discounter, and absolute iPhone prices have not been discounted since the original iPhone, released in July 2007 saw a substantial price cut a few months later, “to make it more affordable for even more customers as we enter the holiday season”, as Steve Jobs put it. Since then retail iPhone price cuts were only made after the current models had been on sale for many months and new models were just around the corner, however wholesale prices have been the way that Apple has usually ‘encouraged’ retailers and carriers to feature the iPhone to customers.
It seems that Apple is once again using that tactic to gain some ground in China as it is reducing the wholesale price of the iPhone XR, the most popular model of the 2018 iPhone family from 5700 Yuan ($840.36 US) to 5250 Yuan ($774.02 US), a 7.9% reduction and will make slightly smaller reductions in the wholesale price of the iPhone XS and XS Max, also cutting the iPhone 8 and 8+, which is even more telling.
As the iPhone XR is the best-selling model of the three current phones, it would seem the intent would be to increase overall unit volumes by offering the biggest discount to the best-selling model, rather than the higher-priced XS and Max, but by offering discounts on the older S8 and S8+, which have been selling better than expected at the expense of the newer models, the goal of increased unit volumes is obvious. Margins would be another question, and while we would expect the XR, with the slightly bigger discount, to be the one that would see a bigger proportional gain in sales, we would expect that model had better relative margins which would now be equal to or nearer the XS and Max. As the discounts for the older iPhone 8 and 8+ are proportional on a dollar basis to the XS and Max, we have to assume that the margins on those products will be lowered more than the others.
The idea that Apple is discounting wholesale prices in China so soon after the initial release of the current iPhone does not mean that retail prices in China will go down and the current retail price for the 64GB iPhone XR remains 6,500 Yuan ($958.31), but it does incentivize the carriers and retailers to steer customers toward a product where they are now able to see higher internal margins, which tends to translate to higher sales commissions, and if you have ever worked as a retail salesman, the answer to the question as to which product is better, is always the one that gives me the most commission.
All in, this is in keeping with Apple’s 4Q guidance reduction and more recent reductions in 1Q orders, with the company looking to stimulate overall iPhone volumes, at least in China. Whether they will offer the same discounts to other regions remains to be seen, but likely will depend on whether the company sees better results in China over the next few weeks. More to the point however should be the question as to how the current situation and the necessity for such ‘stimulus’ programs will affect the next generation of iPhones due out later this year. We have already heard rumors that Apple was looking to cut costs by using lower cost methods to meet feature set goals, but we see such cost reduction programs also limiting new (and usually more expensive, at least at the onset) features that are necessary to compete with aggressive Chinese and South Korean brands. While we expect the near-term effects of the discounting programs will be marginal, their necessity puts a bigger focus on iPhone margins and the balance between those margins and the need to innovate. Will Apple choose to lose share but remain a highly innovative and profitable smartphone manufacturer, or will they accept lower margins and gain share against their competitors. It seems far more difficult to do both than it has in the past.
It seems that Apple is once again using that tactic to gain some ground in China as it is reducing the wholesale price of the iPhone XR, the most popular model of the 2018 iPhone family from 5700 Yuan ($840.36 US) to 5250 Yuan ($774.02 US), a 7.9% reduction and will make slightly smaller reductions in the wholesale price of the iPhone XS and XS Max, also cutting the iPhone 8 and 8+, which is even more telling.
As the iPhone XR is the best-selling model of the three current phones, it would seem the intent would be to increase overall unit volumes by offering the biggest discount to the best-selling model, rather than the higher-priced XS and Max, but by offering discounts on the older S8 and S8+, which have been selling better than expected at the expense of the newer models, the goal of increased unit volumes is obvious. Margins would be another question, and while we would expect the XR, with the slightly bigger discount, to be the one that would see a bigger proportional gain in sales, we would expect that model had better relative margins which would now be equal to or nearer the XS and Max. As the discounts for the older iPhone 8 and 8+ are proportional on a dollar basis to the XS and Max, we have to assume that the margins on those products will be lowered more than the others.
The idea that Apple is discounting wholesale prices in China so soon after the initial release of the current iPhone does not mean that retail prices in China will go down and the current retail price for the 64GB iPhone XR remains 6,500 Yuan ($958.31), but it does incentivize the carriers and retailers to steer customers toward a product where they are now able to see higher internal margins, which tends to translate to higher sales commissions, and if you have ever worked as a retail salesman, the answer to the question as to which product is better, is always the one that gives me the most commission.
All in, this is in keeping with Apple’s 4Q guidance reduction and more recent reductions in 1Q orders, with the company looking to stimulate overall iPhone volumes, at least in China. Whether they will offer the same discounts to other regions remains to be seen, but likely will depend on whether the company sees better results in China over the next few weeks. More to the point however should be the question as to how the current situation and the necessity for such ‘stimulus’ programs will affect the next generation of iPhones due out later this year. We have already heard rumors that Apple was looking to cut costs by using lower cost methods to meet feature set goals, but we see such cost reduction programs also limiting new (and usually more expensive, at least at the onset) features that are necessary to compete with aggressive Chinese and South Korean brands. While we expect the near-term effects of the discounting programs will be marginal, their necessity puts a bigger focus on iPhone margins and the balance between those margins and the need to innovate. Will Apple choose to lose share but remain a highly innovative and profitable smartphone manufacturer, or will they accept lower margins and gain share against their competitors. It seems far more difficult to do both than it has in the past.
Apple makes cuts to 1Q iPhone production - 01-09-19
According to the Japanese trade press, Apple (AAPL) suppliers have received notice to reduce the production of iPhones in 1Q from ~47m to 48m units to between 40m and 43m units, or between ~10% and 15%. The reduction includes newer models like the iPhone XS and XR and potentially older models, which have been selling better than expected, although confirmation for the older models has yet to be received. Apple sold 52.2m iPhones in 1Q last year, although the comparison here is sell-in against sell-through.
If this additional cutback is confirmed (the first was in November), we would expect to hear even more muted 1Q guidance from supply chain participants, especially those that are unit based. While expectations for lower iPhone sales levels might have been more recently built into investor expectations for 4Q 2018, an extended reduction in 1H or full year expectations is likely not fully assumed. Suppliers tend to be optimistic this early in the year, regardless of general circumstances, as the hope that 2H will see a recovery in smartphone unit volumes tends to fuel that optimism however fragile it might be. While the Chines New Year (Feb. 5) might help to bolster confidence that Apple will see reasonable share in the Chinese smartphone market In 1Q (15.6% last year in 1Q), we note that local (Chinese) brand share tends to decline in 1Q, only to return to 90%+ levels in 2Q, leaving little time for non-Chinese brands to gain a more substantial foothold. That said, the overall share of local brands in the Chinese smartphone market has been on the decline but still averaged a bit over 89% for the first 11 months of last year.
If this additional cutback is confirmed (the first was in November), we would expect to hear even more muted 1Q guidance from supply chain participants, especially those that are unit based. While expectations for lower iPhone sales levels might have been more recently built into investor expectations for 4Q 2018, an extended reduction in 1H or full year expectations is likely not fully assumed. Suppliers tend to be optimistic this early in the year, regardless of general circumstances, as the hope that 2H will see a recovery in smartphone unit volumes tends to fuel that optimism however fragile it might be. While the Chines New Year (Feb. 5) might help to bolster confidence that Apple will see reasonable share in the Chinese smartphone market In 1Q (15.6% last year in 1Q), we note that local (Chinese) brand share tends to decline in 1Q, only to return to 90%+ levels in 2Q, leaving little time for non-Chinese brands to gain a more substantial foothold. That said, the overall share of local brands in the Chinese smartphone market has been on the decline but still averaged a bit over 89% for the first 11 months of last year.
LG Rollable TV – Just two things missing…
LG Electronics (006570.KS) has officially released its rollable OLED TV, model OLED65R9PUA, and while the TV and its release have not really been a secret, we feel obligated to acknowledge it, given its unusual and groundbreaking nature. The TV is an outgrowth of the ‘wallpaper’ demo that LG has shown over the last two years, which was held to the wall with magnets and could be pulled off the wall by flexing the TV like a sheet of metal (which it was). In this new iteration the TV can stay rolled up in a cabinet that also contains speakers (which can be used even when the TV is closed) and can also be raised to full height for normal TV viewing or ‘frame’ mode, where the TV can display artwork of the user’s choosing. But LGE marketing has also cooked up the ‘Horizon’ mode, where just a few inches of the TV screen is revealed, which can be used to view the weather or act as a home dashboard.
While we poke fun at the formality of the ‘Horizon’ viewing mode, LGE has taken the flexible OLED TV and packaged it in a way that makes it simple for the user. No wires (other than to plug it in to the wall outlet) to worry about, no magnets, just a nice metal box with a wool speaker covers that most wives would be able to tolerate. That said, thus far there are two key items that are missing, price and availability, oh and also details on the specifications, which we expect will be released over the next few days at CES. Availability will be a question that should be relatively easy to answer, with a likely first release in South Korea, followed by China, the US, and Europe, but the cost is likely a bit trickier.
Figure 1 - LG Electronics "Wallpaper" OLED TV - Source: CNET
A static (rigid) 65” OLED TV from LG Electronics ranges in price from a bit over $2,000 to as much as $7,000 depending on the model and production year, but we would estimate that the norm would be ~$2,300 (2017 or 2018 models), and while we would expect the rollable version to be more expensive due to packaging, marketing, and development costs, we would hope that it gets initially priced below $3,000. Much will depend on whether LG Electronics wants this to actually be a high volume commercial product, or one that is used to show LGE’s technical capabilities as was the ‘wallpaper’ version, which sells for ~$7,000, limiting the customer base to the tip of the triangle.
As to the exact specifications, we expect they will be the same as those of the wallpaper TV, with the addition of a 50,000 ‘roll’ lifetime, meaning if you unroll the TV twice a day, it will continue to function for 68 years, a lifetime longer than the OLED materials will last. We assume the unit will have all of the typical bells and whistles that LGE’s high-end TVs have and will eventually be available in 77” and possibly 88” sizes. Again, because the tech press will likely make this one of the focal points of this year’s CES, We note that even if the set is priced at nose-bleed levels, it represents a very significant accomplishment for LG Display (LPL), LG Electronics, and the TV industry overall, and one that was accomplished in a relatively short period of time. The use of flexible OLED displays has already become known to the general public and with the introduction of foldable smartphones later this year, will become the norm for a wide variety of applications over the next few years, with TVs being the stepping off point for public display products that can be fit to almost any surface or can be rolled out like a newspaper. Hat’s off the LGE.
Figure 2 - LG Electronics "Rollable" TV - Source: LG Electronics
While we poke fun at the formality of the ‘Horizon’ viewing mode, LGE has taken the flexible OLED TV and packaged it in a way that makes it simple for the user. No wires (other than to plug it in to the wall outlet) to worry about, no magnets, just a nice metal box with a wool speaker covers that most wives would be able to tolerate. That said, thus far there are two key items that are missing, price and availability, oh and also details on the specifications, which we expect will be released over the next few days at CES. Availability will be a question that should be relatively easy to answer, with a likely first release in South Korea, followed by China, the US, and Europe, but the cost is likely a bit trickier.
Figure 1 - LG Electronics "Wallpaper" OLED TV - Source: CNET
A static (rigid) 65” OLED TV from LG Electronics ranges in price from a bit over $2,000 to as much as $7,000 depending on the model and production year, but we would estimate that the norm would be ~$2,300 (2017 or 2018 models), and while we would expect the rollable version to be more expensive due to packaging, marketing, and development costs, we would hope that it gets initially priced below $3,000. Much will depend on whether LG Electronics wants this to actually be a high volume commercial product, or one that is used to show LGE’s technical capabilities as was the ‘wallpaper’ version, which sells for ~$7,000, limiting the customer base to the tip of the triangle.
As to the exact specifications, we expect they will be the same as those of the wallpaper TV, with the addition of a 50,000 ‘roll’ lifetime, meaning if you unroll the TV twice a day, it will continue to function for 68 years, a lifetime longer than the OLED materials will last. We assume the unit will have all of the typical bells and whistles that LGE’s high-end TVs have and will eventually be available in 77” and possibly 88” sizes. Again, because the tech press will likely make this one of the focal points of this year’s CES, We note that even if the set is priced at nose-bleed levels, it represents a very significant accomplishment for LG Display (LPL), LG Electronics, and the TV industry overall, and one that was accomplished in a relatively short period of time. The use of flexible OLED displays has already become known to the general public and with the introduction of foldable smartphones later this year, will become the norm for a wide variety of applications over the next few years, with TVs being the stepping off point for public display products that can be fit to almost any surface or can be rolled out like a newspaper. Hat’s off the LGE.
Figure 2 - LG Electronics "Rollable" TV - Source: LG Electronics
Samsung lowers smartphone shipment expectations
Adding insult to injury after the abovementioned 4Q guidance reduction at Samsung Electronics, the company also quietly lowered its 2019 smartphone sales goal for 2019. We believe the previous goal of 320m units, set in October 2018, has been reduced to ~ 290m, a 9.4% reduction. Typically such goals are set in October of the preceding year, with changes usually made in January, May, and July of the target year.
The impact of Samsung’s reduction will not only be felt by Samsung itself, but by the supply chain who we expect will give less optimistic guidance when reporting 4Q 2018 results. Of course, Chinese smartphone brands are expecting to capture a portion or all of the reduction by Samsung and the implicit reduction by Apple, although we expect even the most popular Chinese brands will be a bit more cautious toward their smartphone growth expectations as the year develops. Chinese smartphone leader Huawei (pvt) is expecting 20% to 25% growth, with Xiaomi (1810.HK) set at ~20%, and both Oppo (pvt) and Vivo (pvt) set for 15% to 20% growth. All in the top 4 Chinese smartphone brands expect an increase in unit shipments of ~120m units, which at this early stage, is looking to be a difficult task.
The impact of Samsung’s reduction will not only be felt by Samsung itself, but by the supply chain who we expect will give less optimistic guidance when reporting 4Q 2018 results. Of course, Chinese smartphone brands are expecting to capture a portion or all of the reduction by Samsung and the implicit reduction by Apple, although we expect even the most popular Chinese brands will be a bit more cautious toward their smartphone growth expectations as the year develops. Chinese smartphone leader Huawei (pvt) is expecting 20% to 25% growth, with Xiaomi (1810.HK) set at ~20%, and both Oppo (pvt) and Vivo (pvt) set for 15% to 20% growth. All in the top 4 Chinese smartphone brands expect an increase in unit shipments of ~120m units, which at this early stage, is looking to be a difficult task.
Panda Gen 8.6 LCD fab said to be ahead of schedule
The Chinese trade press has indicated that Panda’s (553.HK) Chengdu Gen 8.5 LCD fab that has been in ramp mode, has reached 83% utilization for the combined phase 1 and 2 build programs. This would indicate that the phase 2 build out has already been implemented and the phase 1 build out is ahead of our timeline. Based on our read on progress, we had expected the Panda fab to be at the 83% utilization level in 3Q 2019, which puts it far ahead of our original estimates.
While there has been no mention of whether the 100,000 sheet number that yields an 83% utilization is a run rate, or just the number of panels that have been run through the fab since it opened, we have to also assume that these are unyielded numbers. The actual fab output remains unknown, and we have our doubts as to the accuracy of the statements, but there is always the possibility that Panda has successfully accelerated the fabs progress and achieved such goals as this is their second oxide based Gen 8 fab of this size (they have an older Gen 8 fab with a total output of 25,000 sheets/month). We have not changed the Panda timeline in our database as we have yet to confirm the production levels, but it would represent an achievement for Panda if they were able to push the Chengdu fab’s timeline forward by that much.
While there has been no mention of whether the 100,000 sheet number that yields an 83% utilization is a run rate, or just the number of panels that have been run through the fab since it opened, we have to also assume that these are unyielded numbers. The actual fab output remains unknown, and we have our doubts as to the accuracy of the statements, but there is always the possibility that Panda has successfully accelerated the fabs progress and achieved such goals as this is their second oxide based Gen 8 fab of this size (they have an older Gen 8 fab with a total output of 25,000 sheets/month). We have not changed the Panda timeline in our database as we have yet to confirm the production levels, but it would represent an achievement for Panda if they were able to push the Chengdu fab’s timeline forward by that much.
Xiaomi buys shares in TCL
Chinese smartphone manufacturer Xiaomi (1810.HK), who has recently entered the TV market, has purchased over 65million TCL (000100.CH) shares in the open market, giving them a 0.48% stake in the company. This follows the signing of a ‘strategic cooperation agreement’ between the two that was signed at the end of last year. While the share purchase is a relatively small one given the vast number of TCL shares outstanding, it does give some indication that Xiaomi’s new TV endeavor in India is not just a test to see if it can duplicate the success it has had in the country with its smartphones (it took top share in 3Q 2018 from leader Samsung Electronics (005930.KS)), and we note that TCL’s ownership of panel producer Chinastar (pvt) does not go unnoticed also.
Xiaomi’s push into the Indian TV market with models that sell for far less than name brands follows its concept of limiting its net profit on such devices to 5% in order to maintain such low pricing, but it also uses the Android operating system for its TVs, as it does for its smartphones and is promoting the sharing of content between both Android platforms as a selling point for both. Xiaomi’s TVs also offer a considerable amount of free content through negotiated deals with a number of high profile content suppliers to further their attraction to customers and we expect TCL is also looking to more closely align its TCL TV brand to be able to share some of that content.
TCL has stated that it wants to execute a complex reorganization that will essentially separate its home appliance and consumer electronics businesses from Chinastar but has faced considerable pushback from both government agencies (particularly the Shenzhen Stock Exchange) that are trying to understand the reasoning behind the changes and whether the shift will burden on side with those assets that are losing money or are less profitable. The TCL Group will have a shareholder meeting today to discuss the details of the restructuring plan, for which management and the company’s founder are supporters.
Xiaomi’s push into the Indian TV market with models that sell for far less than name brands follows its concept of limiting its net profit on such devices to 5% in order to maintain such low pricing, but it also uses the Android operating system for its TVs, as it does for its smartphones and is promoting the sharing of content between both Android platforms as a selling point for both. Xiaomi’s TVs also offer a considerable amount of free content through negotiated deals with a number of high profile content suppliers to further their attraction to customers and we expect TCL is also looking to more closely align its TCL TV brand to be able to share some of that content.
TCL has stated that it wants to execute a complex reorganization that will essentially separate its home appliance and consumer electronics businesses from Chinastar but has faced considerable pushback from both government agencies (particularly the Shenzhen Stock Exchange) that are trying to understand the reasoning behind the changes and whether the shift will burden on side with those assets that are losing money or are less profitable. The TCL Group will have a shareholder meeting today to discuss the details of the restructuring plan, for which management and the company’s founder are supporters.
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