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Apple Scales Back Orders for iPhones

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01/05/2016 | 10:25pm EDT

BEIJING?Apple Inc. is scaling back orders for its iPhones, sending ripples throughout the multibillion-dollar industry that supplies and builds the company's phones.

A Chinese provincial capital promised Foxconn Technology Group?which assembles iPhones?more than $12 million in subsidies to minimize layoffs at its operations there, according to a government document. The subsidies came after Foxconn began dismissing some workers there earlier than usual for the Chinese Lunar New Year break, according to people familiar with the manufacturer.

Component suppliers that rode the iPhone's boom are now bracing for lower sales. Apple has cut its order forecasts to iPhone suppliers in the past several months, according to three people familiar with the company's supply chain.

Apple provides suppliers with projections on possible orders months in advance and makes adjustments over time, based on demand and inventory, according to suppliers.

Apple launched the iPhone 6S and 6S Plus in September. Coming off a booming year of iPhone sales with new models that offered few noticeable changes, analysts warned that Apple would struggle to grow demand of its flagship product. In October, Apple Chief Executive Tim Cook said it expected iPhone sales to increase in its fiscal first quarter ended in December from the same period a year earlier, but declined to make projections further out into the future.

But Chinese iPhone factories had some idle capacity in the final two months of the calendar year, when they would typically be racing to chongliang, or "rush quantity," for Apple, in factory-speak. Some workers at Foxconn's Zhengzhou factory in inland China were let go on early holiday last month, one of the people involved in the supply said, although the typical new-year holiday season doesn't start until February.

An Apple spokeswoman said the company never discusses sales forecasts and referred layoff questions to its contract manufacturer Foxconn, officially known as Hon Hai Precision Industry Co. Foxconn's Zhengzhou plant employs at least 200,000 workers who analysts say are primarily involved in producing iPhones. The company said the subsidiaries received from Zhengzhou were granted for providing stable employment in 2014 and were unrelated to other factors.

"The incentives were provided to Foxconn in recognition of our company's contributions to maintaining our significant work force at our Zhengzhou facility throughout that year," the company said in a statement.

The Zhengzhou government didn't respond to a request for comment.

Zhengzhou's human resources and social security department posted a notice on its website dated Dec. 25 that it would grant Foxconn 81.9 million yuan ($12.6 million) as an "unemployment-insurance work-force stabilization subsidy."

This sum granted to Foxconn was more than half of the total funds that Zhengzhou has allotted to 135 companies under an unemployment insurance program begun last year. The government said in the notice that the program was aimed at minimizing unemployment under what Chinese leaders call the "new normal" of China's slowing economy.

"Zhengzhou is the largest base for iPhone manufacturing, so this should reflect iPhone sales," said IDC analyst James Yan.

IPhone concerns have weighed on Apple's stock. The shares are down 13% over the past month. The stock fell 2.5% to $102.71 on Tuesday after Japan's Nikkei newspaper reported that Apple is expected to reduce its output of iPhone 6S and iPhone 6S Plus handsets by 30% in the quarter ending in March from its original projections. An Apple spokeswoman declined to comment on the Nikkei report.

Shares of Apple suppliers also have fallen in the past half year, as analysts lowered iPhone shipment estimates and predicted further demand weakening in 2016. Largan Precision Co., long one of Taiwan's most expensive stocks due to its role as an iPhone camera module supplier, has seen its stock slide to 2,110 New Taiwan dollars on Tuesday from a peak of NT$3,710 in July. Largan declined Tuesday to comment on iPhone demand.

Foxconn's stock is at a two-year low of NT$79.10, down from NT$110 in mid-2014.

Fubon Securities analyst Arthur Liao predicted in a client note last month that iPhone shipments in the first half of 2016 would be down 17% from a year earlier due to Apple's 2015 phones because they lack obvious differences from the previous year's.

He wrote that Pegatron Corp., Apple's secondary iPhone assembler after Foxconn, would be hit particularly hard due to a larger percentage of its revenue derived from iPhones and that its factory utilization rate was around 60%. Pegatron's stock has slid from a peak of NT$94.10 in July to NT$72 on Tuesday, the steepest half-year slide in its history. A Pegatron spokesman declined to comment.

Yang Jie in Beijing and Daisuke Wakabayashi in San Francisco contributed to this article.

Write to Eva Dou at eva.dou@wsj.com

Corrections & Amplifications

This article was corrected at 11:28 GMT to fix original which incorrectly said Foxconn declined to say if changes in iPhone demand were a factor in the subsidies it received from Zhengzhou in the 7th paragraph. Foxconn subsequently said there were no other factors involved in the granting of the subsidies.

Stocks mentioned in the article
ChangeLast1st jan.
APPLE 0.94% 222.77 Delayed Quote.39.91%
LARGAN PRECISION CO., LTD. End-of-day quote.
NIKKEI 225 -0.18% 21960.71 Real-time Quote.9.86%
US DOLLAR / CHINESE YUAN RENMINBI (USD/CNY) -0.07% 7.0849 Delayed Quote.2.77%
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