After the initial wave of pre-orders of the iPhone 14 series and looking at the 2022 phone sales, Apple has started to adjust the production of the iPhone 14 series. Some possible justifications for the expected decrease in production include the rising interest rate, inflation figures, supply chain issues, fear of predicted recession, and similar others.
But the question is how come a company that became a $2 trillion company in the 2020 COVID-19 pandemic (even a $3 trillion company in 2022), fears the recession when it seems less bad than the pandemic? Let’s explore this point in detail in this article in light of Apple’s recent Q4 2022 earnings and other macroeconomic factors.
Apple Decreasing the Production of iPhone 14 Plus
It is hard to accept, but Apple is actually decreasing the production of the iPhone 14, especially the iPhone 14 Plus model due to its weak sales compared to its more expensive Pro models, as per TrendForce.
The iPhone 14 Pro series come with many enhanced specifications at the same price as of iPhone 13 Pro series in the U.S., eventually making users buy the Pro series models. Moreover, the delay in the launch of the iPhone 14 Plus also led to more sales of the Pro series. In fact, the production ratio of both iPhone 14 Pro and iPhone 14 Pro Max has increased from 50% to 60% and is expected to even grow to 65% in the near future. Overall, Apple currently targets to keep a 36% portion of overall shipments for new iPhone models.
Considering the interest rate hikes and their impact on consumer income, the smartphone industry will definitely experience some pressure in maintaining its sales figures. As per TrendForce, Apple will most likely feel the impact in the first quarter of 2023. It is projected that the production will drop to 52 million units compared to the estimated 56 million units, which will show a decline of 14% YoY.
Apple’s Q4 2022 Earnings – Exceeding the Expectations
On October 27, 2022, Apple announced its fourth-quarter earnings that exceeded the revenue and earnings per share expectations of Wall Street. The October earnings statistics involved a few days of iPhone 14 sales, so it gives a little glimpse of how things are going currently. Below is a quick look at some of the key earning statistics of Apple in Q4 2022 vs. Refinitiv consensus estimates:
- Revenue: $90.15 billion vs. $88.90 billion est. (+8.1% YoY)
- EPS: $1.29 vs. $1.27 est.
- iPhone Revenue: $42.63 billion vs. $43.21 billion est. (+9.67% YoY)
- iPad Revenue: $7.17 billion vs. $7.94 billion est. (-13.06% YoY)
- Mac Revenue: $11.51 billion vs. $9.36 billion est. (+25.39% YoY)
From the above statistics, it is clear that the impact of interest rate hikes or other macroeconomic factors is not prominently impacting the revenue, but we can clearly see a slight drop in iPhone revenue compared to the estimated figure. Apple CEO Tim Cook highlighted that the phone sales performance of Apple is much better compared to many other smartphone companies that are experiencing a decline due to a decrease in demand.
However, this does not mean that Apple can absorb the predicted recession and other macroeconomic factors easily. The company is already taking smart moves to combat the recession and other factors (discussed in the last part of this article).
Key Factors that Impact Apple Sales
Before we start discussing how Apple is addressing the global recession fears, let’s highlight the key factors that can impact Apple sales in the next few quarters:
- Interest Rate Hikes: To tackle inflation, Fed is raising interest rates aggressively for the past few months. The recent 0.75% rise has made the U.S. interest rate hit a 14-year high. With the raise of the interest rate, borrowing becomes harder and debt becomes costlier. Eventually, it leads Apple users to avoid buying new models and stick with their current ones.
- Inflation: Inflation is a global concern, which is forcing consumers to cut their extra expenses and focus more on essentials. Moreover, since new iPhone models are not coming with major structural changes, so many will tend to stick with their older models until their financial position improves.
- Strong Dollar: The interest rate hikes pump up the value of the dollar, making it stronger compared to other currencies. Due to that, many international currencies are recording historic lows against the U.S. dollar. So, the strong dollar is another influential factor in dropping Apple sales because the company has to increase the price of its phones even higher, making it even more difficult for consumers of those countries to purchase iPhones.
- Supply Chain Disruption: Ever since the pandemic, Apple is facing supply chain disruption. US-China relations, China COVID control, chip shortage, sanctions on Chinese chips, and similar other factors are impacting the supply chain, eventually causing the company to reduce its production.
Are Apple Users Shifting to Android Devices?
Other than the macroeconomic factors, some think that another reason why Apple is reducing production is that Apple users are shifting to Android devices. They believe that Apple failed to provide game-changing new features or significant hardware design changes in its recent models. But most don’t believe in such speculations because Apple users have shown many times that they are loyal to the brand. In fact, iPhone has also overtaken Android devices in the U.S., as more than 50% of smartphone users in the U.S. use iPhones.
Apple CEO Tim Cook also mentioned after 4Q 2022 results that the current active buyers of iPhones are “switchers”, which are individuals that are shifting from Android to iPhone. So, thinking that the decline in iPhone 14 production is due to the shift to Android devices does not seem to be true currently. The production decline is mostly due to the other factors discussed above.
Apple’s Strategy to Combat Recession Fears
Apple is smartly taking countermeasures with the changing global macroeconomic indicators. Some of the prominent strategies adopted by Apple to combat recession and revenue drops are as follows:
- Production in India: Apple is on the move to start manufacturing iPhone 14 in India to diversify its supply chain and reduce its production dependence on China. TrendForce projects that Apple’s production in India can exceed by 5% in 2023 and even more with every passing year.
- Softness in Advertisement Spending: Apple is showing some softness in advertisement spending to absorb the expected revenue drop.
- Slowed the Pace of Hiring: Instead of doing layoffs, Apple has reduced the pace of hiring and is now hiring deliberately.
- Adjusting the Price of iPhones in Other Countries: Apple is keeping the iPhone prices in the U.S. the same but is actively adjusting the prices for other countries to address strong dollar and rising component costs.
Other than the above measures, Apple is also smartly handling its production. The reduced production of iPhone 14 Plus and increased production of iPhone 14 Pro models are indicators that the company is addressing the recession fears smartly.
Recession fears are all over the news for the past couple of months. Tech companies are already taking measures to address the predicted recession and other macroeconomic fears. For example, Microsoft recently lay off over 1000 employees. Apple is also taking countermeasures by slightly reducing its iPhone production, rearranging its supply chain, and taking plenty of other measures.
Things might change more in the next few months since the impacts of interest rate hikes, the strong dollar, and the recession will start reflecting in the quarterly earnings of 2023. So, we can just wait and watch how the recession fears impact the tech giants in the next few months.