Apple to Begin iPhone Production This Quarter

By LORRAINE LUK, JESSICA E. LESSIN and EVA DOU

Apple plans to begin production of a new iPhone, according to sources. Jessica Lessin reports on digits. Photo: Getty Images.

Apple Inc. AAPL -0.83% plans to begin production of a refreshed iPhone similar in size and shape to its current one in the second quarter of the year, according to people familiar with the device’s production, teeing up a possible summer launch for the next version of its flagship device.

BCG Financial senior financial analyst Colin Gillis discusses Apple’s plans to start iPhone production this quarter, the sagging stock price, and Tim Cook’s management style.

At the same time, Apple continues to work with its manufacturing partners in Asia on a less expensive iPhone that could be launched as soon as the second half of this year, these people said. The four-inch device likely will use a different casing from the higher-end iPhone. Apple has been working on different color shells for the phone but its plans remain unclear.

An Apple spokeswoman declined to comment. The Wall Street Journal earlier reported that the company was working on a less expensive iPhone that could go on sale as soon as this year. Analysts have said they expect Apple to launch its next iPhone around the summer.

The two devices reflect new pressures on Apple. The Cupertino, Calif., company has long commanded unique premiums for the iPhone, but consumer demand for cheaper products is spiking. A flood of smartphone entrants and the rise of Samsung Electronics Co. 005930.SE -0.99% have commoditized the market, squeezing margins and dividing profits among an array of devices.

“There isn’t really any major differentiator between the players at this phase,” said Neil Mawston, an analyst at research firm Strategy Analytics. He said to cope, Apple needs to take a page from Samsung and launch more products faster.

“The panacea is to transform the industry with a revolutionary design,” Mr. Mawston said. Until then “you have to do the traditional business school implementations like manage costs and move quicker than rivals.”

How the innards of the next iPhone may differ from the iPhone 5, which went on sale last September, remains unclear. Apple often upgrades the processor and other components like the camera between models. Apple is also expected to ship the next version of its iOS mobile operating system around midyear, other people familiar with the matter have said.

Apple Chief Executive Tim Cook has repeatedly declined to comment on Apple’s plans for a cheaper device. But he and other executives have been fighting to protect Apple’s premium image. At an investor conference in February, he said Apple “wouldn’t do anything that we consider not a great product.”

Investor confidence in Apple has sagged to address the more sober reality for smartphones. Apple shares closed Tuesday at $429.79, up 0.2% but well below a high of $702.10 last September.

While the company is widely believed to have innovative products up its sleeve, many analysts think the next developments that could really disrupt the market—like bendable displays or mainstream wearable devices—are years away.

Samsung is preparing to sell its next smartphone, the Galaxy S 4, in the second quarter. The company has been gaining share of smartphone shipments and profits. But Apple has been holding its own.

Samsung’s share of global handset shipments rose to 25% in 2012 up from 21% in 2011, according to Strategy Analytics. Apple’s rose to 8.6% from 6.0%. Last year, Apple captured nearly two-thirds of the profits in the industry, up from 62% in 2011. Samsung’s share rose to about a third from 19%.

—Juro Osawa and Mayumi Negishi contributed to this article.