Nintendo takes a gamble with record-setting Switch production plans

The Nintendo Switch has been an unqualified success so far, with Nintendo recently promising increased holiday season production to meet demand and expectations of over 16 million total sales by the end of March 2018. Reporting now suggests the company is expecting that sales pace to increase markedly in the coming year, though, and another associated production increase would come with both a fair amount of potential and risk for the company.


The production news comes from The Wall Street Journal, which cites “people with direct knowledge of the matter” in reporting that Nintendo plans to make 25 to 30 million Switch units in the coming fiscal year (which starts in April 2018). That’s a major increase from the 13 million produced for the current fiscal year, which itself was a sizable increase from the company’s initial plans to make just 8 million units for the console’s first full year on shelves. WSJ‘s sources say those production numbers could go up even higher if coming holiday season sales are strong.

Even the low end of that 25 million sales range is ambitious, to put it mildly. The Wii sold 25.94 million units in its second full fiscal year, during the height of the sellout mania surrounding that motion-control console. These days, the market-leading PS4 sold just 17.7 million in its second full fiscal year on shelves. Even the market-dominating PS2 sold just 22.52 million units in its most successful fiscal year, roughly three years after launch.

While those comparisons don’t line up perfectly with the Switch (which launched in March and not the October/November period of previous best-selling consoles), the reported production increase suggests Nintendo expects the Switch to sell at something like a record-setting pace for this point in the lifespan of a modern consoles.

The potential

There’s obvious reason for that kind of confident ramp-up from Nintendo. When the company underestimated the initial demand for the Switch, it led to widespread retail shortages for the system, which Nintendo swears were not intentional. And that was well before the launch of a marquee, system-selling title like Super Mario Odyssey and the upcoming launches of Pokemon and Metroid Prime titles for the system (which may or may not make the 2018 fiscal year). Plus, with major third-party publishers finally coming around with plans for major game ports and releases for the Switch, demand for the system could definitely increase.

On the other hand, there are some signs the Switch’s sales rate may already be plateauing. The once hard-to-find system is much easier to find on store shelves and online retailers of late (though that will likely change during the holiday sales rush). And while the Wii had titles like Wii Sports and Wii Fit attracting lapsed and casual gamers to the low-priced hardware in its second year, the Switch’s lineup is tilted more heavily towards Nintendo’s more established franchises and traditional gameplay types (Nintendo President Tatsumi Kimishima has hinted that more “casual” fare is in the works for the system).

The kind of gamers likely to be attracted by Mario, Zelda, and the like may be more front-loaded toward early adopters who have already purchased the system. That happened in a much more extreme fashion with the Wii U, which sold out in its first holiday season before quickly dropping off.

But maybe a comparison to the Wii isn’t the right one for the Switch. In a recent investor QA, Nintendo revealed that roughly 30 percent of Switch owners use the system primarily in portable mode (i.e. more than 80 percent of the time), with an additional 50 percent using the portable features at least 20 percent of the time. That suggests the Switch may be more comparable to the Nintendo DS line, which eventually became Nintendo’s best-selling hardware ever, with more than 154 million shipments (including 25.86 million in its second fiscal year).

The DS’ success was driven in part by many households that bought a DS unit for each player in the house rather than sharing a single TV-based console. Similar “multi-Switch” families could help juice the Switch’s total sales potential, especially if and when the hardware comes down in price.

The risk

But while the Switch definitely has the potential to see sales increase to stratospheric heights of past Nintendo best-sellers, it’s not at all guaranteed at this point. And ramping up production this high this quickly brings with it some level of risk.

Whenever I hear the conspiratorial complaint that Nintendo is “intentionally” limiting supply of its consoles to create an artificial appearance of demand, my immediate response is “compared to what?” Nintendo can’t just flip a Switch and roll an infinite number of hardware units off the production lines to instantly meet the demand reported by retailers. The company has to estimate what demand will look like months or years ahead of time, then it makes significant investments in raw parts and assembly line resources based on those estimates. Plus, conspiracy theories aside, there’s no real upside to underestimating demand and leaving potential customers hanging while retailers wait for shipments.

Underestimating demand for the NES Classic was bad. Overestimating demand for the Switch would also be bad.

What the “Nintendo should just make more” brigade often fails to consider is that this kind of quick production ramp-up to meet expected demand can be extremely costly and risky if that demand doesn’t materialize. Producing 25 to 30 million Switch units in a year is a great idea if people are increasingly eager to buy the system in the coming months. But if that demand declines as the market starts to saturate, or if it even stays at the already healthy pace of about 13 million units per year, Nintendo will be left with a lot of unsold inventory eating up its cash flow and warehouse space.

Yes, Nintendo should have probably foreseen the frothing demand for the NES Classic Edition well ahead of its instant sellouts and premature discontinuation. But overestimating demand can be just as bad as underestimating it, as Snapchat and its $40 million of unsold Spectacles will tell you.

One interesting wrinkle here is that increasing the production rate of the Switch will probably decrease the per-unit cost Nintendo has to incur to make each unit. Thus, if sales start to level off at the current $300 price point, Nintendo could feasibly lower the price by the 2018 holiday season to clear out inventory while continuing to sell the hardware at a profit.

Whatever ends up happening, the reported quick ramp up in Switch production shows Nintendo has a nearly boundless confidence in the system’s future. That’s a good sign after such confidence was in very short supply in the 3DS and Wii U era. But that kind of confidence could end up looking like overconfidence if the Switch ends up selling at a merely healthy pace rather than a potentially record-setting one. So despite a strong start and Nintendo’s apparent expectations, there’s still some risk in assuming the Switch will end up as a Wii- or DS-level success for the company.


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