Apple Supplier Pegatron’s Hiring Spree Further Fuels Speculation About A Cheaper iPhone

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Once again, news from a supplier is fueling rumors about Apple’s future product roster. This time it’s manufacturer Pegatron’s announcement that it will increase its number of workers in China by up to 40 percent in the second half of this year. The hiring blitz at the company, which produces iOS devices, has led to new round of speculation that a cheaper iPhone is in the works.

Suppliers have told Reuters that Apple is developing a cheaper iPhone in order to target emerging markets such as China and India. The less expensive version of the smartphone is expected to launch by the third quarter.

Pegatron’s financial performance is closely tied to the Apple products it makes. Just yesterday the company forecast its biggest drop in consumer electronics revenue in six quarters due to falling demand for the iPad Mini. Pegatron said its second quarter revenue will decrease 25 percent to 30 percent from the previous three months.

Other signs that Pegatron is expecting orders for a cheaper iPhone is chief financial officer Charles Lin’s disclosure that more than 60 percent of the company’s 2013 revenue will come from the second half of the year. Pegatron president and chief executive officer Jason Cheng said earlier this week that revenue from communication products will contribute up to 40 percent to the total in second half of 2013, compared to 24 percent in the first quarter.

Apple CEO Tim Cook said last month that the Cupertino company will start rolling out new products this fall and throughout 2014, including devices in “exciting new product categories.” Though its unclear exactly what Apple will be unleashing in a few months, many analysts believe that it will launch a cheaper iPhone instead of a larger-sized “phablet” that would compete with Samsung’s Galaxy Note.

A less expensive handset will allow Apple to compete with cheaper devices running on Android in emerging markets, but analysts’ opinions on how much of an effect a less pricey iPhone would have on Apple’s earnings vary widely. The company posted its first year-over-year earnings decline since 2003 in the second quarter, reporting $43.6 billion in revenue (up from $39.2 billion in the year-ago quarter) along with $9.5 billion in quarterly net profit.

Enders Analysis’ Benedict Evans said “a blockbuster new Apple phone that almost doubles unit sales and blows a hole in the middle of the Android market might only add 5 percent to Apple’s gross profits.”

On the other hand, Morgan Stanley analyst Katy Huberty believes a cheaper version can potentially add another 20 percent to the 10 percent market share iPhone currently holds in China. “Even in a scenario of low 40 percent gross margin and 1/3 iPhone cannibalization rate (flattening legacy iPhone shipment growth, which we view as conservative, the iPhone Mini adds incremental revenue and gross profit dollars,” she wrote in a recent investors note.