Nintendo

Nintendo Co. is cutting back the production of Switch 2 after demand for the $450 gaming console trailed the company’s expectations during the year-end holiday season, particularly in the US.

The company plans to make 4 million units of its flagship device this quarter, a third less than the 6 million it had originally planned to produce, people familiar with the matter said. The reduced output rate is set to continue in April, the people said, asking not to be named as the figures aren’t public.

After a record-setting debut in June, sales of the Switch 2 have failed to meet Nintendo management’s high expectations. Though demand for a lower-priced but unprofitable variant in Japan has remained strong, sales in the US haven’t met with similar continued success.

Nintendo shares fell as much as 6.3% in Tokyo, their steepest intraday decline since Feb. 4. The stock momentarily dropped to ¥8,835, erasing all gains from a rally earlier this month spurred by the surprise success of the new Pokémon Pokopia game, before paring some losses.

The successful launch of Pokémon Pokopia hasn’t prompted the management to again accelerate production of the Switch 2. Instead, it’s waiting to see if the hit game and other new titles have enough staying power to merit an output increase, the people said.

“This hardware shortfall in its first year, during its big holiday season, is awful news,” said Amir Anvarzadeh, Japan equity strategist at Asymmetric Advisors. “Clearly the software lineup has been poor, at least until most recently with Pokemon showing some hope.”

The output cut shouldn’t affect Nintendo’s ability to meet the average analyst estimate of about 20 million Switch 2 units sold in the fiscal year through this month, the people said.

The Switch 2 also faces cost pressures, including rising memory chip prices that has hit electronics manufacturers across the planet. While the higher semiconductor cost has led Nintendo to consider raising the device’s price — as reported by Bloomberg last month — it hasn’t played a role in the decision to curb output. The production cuts are driven by slower demand from consumers, the people said.

Nintendo representatives didn’t respond to a request for comment.

The weaker-than-expected momentum may push Nintendo to take steps to spur demand, such as introducing new hardware variations. A console’s second year on the market is critical to establishing long-term platform success, as a growing user base attracts developers and creates a virtuous cycle that draws in more players.

With 17.37 million units sold last year since its June 5 launch, Switch 2 is the most successful hardware debut in Kyoto, Japan-based Nintendo’s history. Yet doubts persist about the Mario Bros. creator’s ability to produce games that keep consumers shelling out for its game console, with competition intensifying from rivals such as Sony Corp.

Nintendo has acknowledged softer demand. President Shuntaro Furukawa said on a Feb. 3 earnings call that “overseas sales were somewhat weaker than expected.” Japan outperformed expectations, helped by a domestic variant priced at ¥49,980 ($324).

A setback during the holiday season was the December release of Metroid Prime 4: Beyond, the latest installment in one of Nintendo’s most popular US franchises. The title sold fewer than one million copies that month, a rare sluggish debut for a major Nintendo release. First announced in 2017, the game underwent a lengthy development process aimed at ensuring quality.

Shares of Nintendo fell 40% in the six months to mid-February as concerns over its titles and Switch 2’s long-term success intensified. This month, the stock had recouped some of the losses after Pokémon Pokopia proved a hit, selling more than two million units just in four days.

Nintendo typically begins each fiscal year with a conservative hardware sales forecast and revises it upward as momentum builds, particularly after the third quarter, which captures the crucial year-end shopping season. For the current fiscal year through March, the company initially projected sales of 15 million Switch 2 units and raised that target to 19 million in early November following the strong launch.

But Nintendo left the forecast unchanged when it reported third-quarter earnings in February — a point in the cycle when it has historically increased guidance if performance is in line with the internal plan. That decision suggests sales may have fallen short of expectations during the holiday period.

The 19 million-unit goal also appears cautious relative to analysts’ average estimate of about 20 million devices sold. While the revised production plan would still allow Nintendo to meet those estimates, the decision to scale back output suggests the company had previously been preparing for stronger demand than it’s now experiencing.

The company is analyzing the slowdown but remains confident in the console’s long-term prospects, the people said. One internal debate centers on whether ample inventory in the weeks and months after the Switch 2’s release may have brought forward demand that would otherwise have materialized later in the year.

The war in the Middle East is set to add logistics hurdles and expenses for exporters such as Nintendo. Such expected delays may cause Nintendo to again increase its Switch 2 output, the people said. The company plans to start selling a new battery-replaceable variant in Europe in the next fiscal year, and it wants to make sure adequate quantities will be available in a timely manner, they said.

Longer-term challenges include users’ increasingly fragmented attention and launches such as Grand Theft Auto VI from Take-Two Interactive Software Inc. slated for November. The much-anticipated title is set to be available on multiple platforms, but Nintendo is yet to confirm if the Switch 2 is one of them.

For this year’s holiday season, “Nintendo is facing the GTA VI tsunami, not to mention higher memory prices which they may now need to swallow to keep hardware sales from plunging,” Anvarzadeh said. “I don’t think the market fully realizes how bad this is.”

— With assistance from Alice French