By Yoko Kubota 

BEIJING--When Apple Inc. launched the iPhone XR in October, Tim Cook singled out the device to his more than a million followers on Weibo, China's equivalent of Twitter. "Wonderful to see so many people in China enjoying the new iPhone XR," he said.

The message underscored Apple's hope that the device, the cheapest of its three iPhone releases, would be a strong seller in the world's largest smartphone market.

Instead, the XR has fallen far short of Apple's expectations, forcing the company to reduce production of the device drastically and cutting into overall revenue projections.

While Apple doesn't release sales data on its phones, demand has been weaker than expected, people familiar with the matter say, and lackluster China sales of iPhones in part contributed to Mr. Cook last week announcing Apple's first cut in revenue guidance since he took the helm in 2011. Mr. Cook blamed China's slowing economy for weakened demand.

It is too soon to call the XR a flop after only a few months, analysts say. But early indications of sagging sales threaten to derail Apple's profitable strategy of selling premium smartphones at varying prices, and its plan to jump-start stagnant iPhone growth.

Sales have been weak, analysts say. In Japan, Apple cut the price of the XR and the model is lagging beyond iPhone models from previous years including the iPhone 6S and 8, according to data research firm BCN.

The XR hasn't sold as expected in China because it is being passed over by both price-conscious buyers and status seekers, analysts say.

Some Chinese consumers have perceived the sticker price of 6,499 yuan, or about $945, to be too expensive even though it is at least 25% cheaper than the higher-end iPhone XS and XS Max models. The XR's touted features, such as facial recognition and dual-SIM support, were already available on cheaper phones from Chinese rivals. Consumers coveting status are opting for the top-priced iPhone.

Li Derong, a Shanghai-based programmer, said he is thinking about changing his iPhone 7 to Huawei Mate 20 Pro. As he browsed at a mobile phone shop, Mr. Li said the iPhone is "overpriced," even though he thinks its ecosystem is great. Huawei's battery and camera perform well. The Mate 20's chipset makes it good for playing games, he said.

In China, Apple recently has started offering discounts to the XR for trade-ins with older phones.

By analyzing procurement data and talking to suppliers, UBS analyst Tim Arcuri estimated as of October that Apple planned to have roughly 45% of all new iPhones made be XRs world-wide.

"They just built too many XRs and people just aren't buying them, particularly in China," he said.

Deepening the problem: Apple got hit by currency changes in China, Mr. Arcuri said. As the dollar rose against the yuan, he said he thinks Apple raised the local price of the XR to maintain margins, pushing it further above rival phones from Huawei Technologies Inc. and others with more features.

Mr. Cook acknowledged some of the currency challenges in his letter to investors Wednesday, saying "we knew the strong U.S. dollar would create foreign exchange headwinds."

Apple began selling the XR with the liquid crystal display in late October, five weeks after its pricier organic light emitting diode, or OLED, models went on sale in September. The staggered timing was supposed to allow Apple a month to sell the higher-end models without cheaper competition from itself, analysts have said.

But in an early sign that initial sales failed to meet Apple's expectations, Apple had already cut its production forecast for the phone just days after it went on sale with liquid crystal display, a person familiar with the matter said.

In early November, Mr. Cook, who is usually bullish regarding demand for iPhones when they first go on sale, ducked a question from analysts about demand for the device two weeks after preorders began.

In recent years, the lowest-priced entry model among the newest iPhone lineup, such as the 7 and 8 when they were launched, was popular in China, said Mo Jia, a Shanghai-based analyst at research firm Canalys. Apple likely wanted to continue having such an entry model among its 2018 lineup, though it was likely difficult to offer it at a much lower price than the XS and the XS Max, as that could end up hurting demand for its pricier flagship by taking away customers, Mr. Jia said.

Apple might have thought that the XR "should be attractive enough for the Chinese consumers," said Mr. Jia. But China's smartphone market structure had changed.

Over the past year or so, Huawei has introduced competitive P20 and Mate series and Oppo and Vivo also offered premium models that are more affordable to the mass market that the XR. And even though the pricing of the XR hasn't significantly changed from Apple's past entry models, it is much higher than some of the flagship models offered by brands Oppo and Vivo.

While the iPhone's status symbol has somewhat waned over the years as the product became more commonplace in the Chinese market, it still retains cachet. Nowadays that comes more with the highest-end models--iPhone XS Max, starting at 9,599 yuan in the country.

In China, Apple has been grappling with excess XR inventory, a person familiar with the matter said.

Over the past two months, Apple has slashed its production forecast for the XR multiple times, including in January. By now, Apple's volume outlook for the initial six months or so of production has roughly been halved to between 30 and 40 million units, people familiar with the matter said.

Jay Greene, Chunying Zhang and Takashi Mochizuki contributed to this article.

Write to Yoko Kubota at yoko.kubota@wsj.com

(END) Dow Jones Newswires

January 06, 2019 08:14 ET (13:14 GMT)