Exclusive: Apple readies cheaper iPhone for growth markets

TAIPEI/HONG KONG Tue Aug 23, 2011 7:41pm BST

The Apple Inc corporate logo is pictured on the rear side of the company's Macbook Air notebook computer in Virginia, August 10, 2011. REUTERS/Jason Reed

The Apple Inc corporate logo is pictured on the rear side of the company's Macbook Air notebook computer in Virginia, August 10, 2011.

Credit: Reuters/Jason Reed

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TAIPEI/HONG KONG (Reuters) - Apple Inc will release a cheaper iPhone 4 within weeks, jeopardizing profit margins to win lower-end customers from rivals such as Nokia in China and other emerging markets.

Asian suppliers have begun making a lower-cost version of the hot-selling smartphone with a smaller 8-gigabyte flash drive that will arrive around the same time Apple unveils its much-anticipated iPhone 5, two sources with knowledge of the matter told Reuters.

The world's most valuable technology company has long stuck to the higher end of a booming mobile device arena, but is now seeking out new markets to sustain the rip-roaring pace of growth that has enthralled Wall Street.

It is in talks with leading Chinese carriers China Mobile Ltd and China Telecom Corp Ltd, both of which are eager to carry the device that defined the smartphone market when Apple launched it in 2007.

"A lower-priced version of iPhone 4 seems to be a necessary evil at this point in the iPhone adoption cycle, especially in emerging markets where the average income of individuals is much lower," said Channing Smith, co-manager of the Capital Advisors Growth Fund, which owns Apple shares.

Pat Becker, portfolio manager at Becker Capital Management, said Apple is looking to take a chunk of the market that is currently dominated by Finnish rival Nokia Oyj, which is widely expected to release a new phone running on Microsoft Corp's Windows software as early as end of the year.

Nokia dominates the lower end, while Apple has so far focused only on the premium market.

"Your best defense is sometimes your offense," he said.

A cheaper phone risks cannibalizing Apple's premium iPhone model and pressuring margins, but the California company needs one to expand its emerging market share, analysts say.

The flash drive for the 8-GB iPhone 4 is being manufactured by a South Korean company, one of the sources said on Tuesday, declining to name the company. Apple currently sources its flash drives from Japan's Toshiba Corp and South Korea's Samsung Electronics Co Ltd.

Apple, which demands high levels of secrecy and security from suppliers and employees, would not comment. Samsung also declined comment.

IPHONE 5 BY END-SEPT?

The iPhone 4 was launched June 2010 in black 16-GB and 32-GB versions, with white versions added to the lineup in April. The 8-GB version is expected within weeks, the sources said.

"Apple may want to push into the emerging market segment, where customers want to switch to low- to mid-end smartphones from high-end feature phones, which usually cost $150 to $200," said Yuanta Securities analyst Bonnie Chang.

"But I think for an 8-GB iPhone 4, the price is hard to go below $200, so Apple will still need a completely new phone with low specifications for the emerging markets." An iPhone 4 without contract commitments now costs over $600.

In addition to the launch of the smaller iPhone 4, Apple is targeting an end-September launch for the next-generation iPhone 5, one source said, confirming earlier reports on Apple follower blogsites and industry websites.

The new iPhone -- which some call the iPhone 4S because of its largely identical appearance to the existing iPhone 4 -- will have a bigger touch screen, better antenna and an 8-megapixel camera, one source said.

The iPhone 5's two manufacturers have been told to prepare production capacity for up to 45 million units altogether, the source said. The phone will be made by Hon Hai Precision Industries Co Ltd and Pegatron Corp, the person added.

Apple sold 20.34 million iPhones in the second quarter versus an expected 17 million to 18 million, and is increasingly looking to Asia to boost future results.

Chief Operating Officer Tim Cook said in July the company is particularly optimistic about Greater China, in which Apple includes mainland China, Hong Kong and Taiwan.

"I firmly believe that we are just scratching the surface right now," Cook said about China. "I think there is an incredible opportunity for China there."

Asia-Pacific -- which accounts for about one-fifth of Apple's total revenue -- and Greater China in particular helped Apple's revenue surge 82 percent to $28.6 billion in April-June.

Overall, Asia-Pacific revenue more than tripled to $6.3 billion in the quarter.

(Additional reporting by Poornima Gupta in SAN FRANCISCO, Roger Tung in TAIPEI and Miyoung Kim in SEOUL; Editing by Edwin Chan and Gerald E. McCormick)

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