iPhone is no longer the Apple of consumer's eye

Company's reputation hit by poor sales, child labour and bigger screens

Recent iPhone sales were lower than expected

The iPhone is no longer the "It" phone. Apple last week stunned markets when it announced lower than expected sales, the bad news sending share prices crashing. Its problems were compounded this weekend when it confirmed reports that its suppliers had used illegal child labour to make its products.

The admission has encouraged critics who accuse the company of profiteering. The iPhone has an estimated profit margin of 55 per cent, helping to make Apple one of the world's most valuable listed companies. But iPhone sales were worse than predicted over the Christmas quarter, with 47.8 million iPhones sold, two million short of a forecast 50 million.

An internal audit uncovered 106 "active cases" of children being employed by its suppliers over the course of 2012, and 70 people who had been underage and had either left, or passed the age of 16 by the time of checking.

Of those 106 under-16s, 74 were employed by a single Chinese manufacturer of circuit-board components used in Apple products. Apple said a local labour agency "knowingly" supplied the children and responded by terminating its relationship with the supplier, and reporting the labour agency to authorities which fined it and suspended its licence.

"Our approach to underage labour is clear: We don't tolerate it, and we're working to eradicate it from our industry," Apple wrote in its report. "When we discover suppliers with underage workers or find out about historical cases ... we demand immediate corrective action."

The news followed the high-profile protest by Chinese workers at Foxconn, the world's largest electronics manufacturer, which supplies Apple and others. About 150 workers threatened to commit suicide by leaping from their factory roof in protest at their working conditions but were coaxed down after two days by Foxconn managers and local Chinese Communist party officials.

The setbacks have added more pressure on chief executive Tim Cook. Apple's stock reached a peak of $705.07 in September last year,but last week fell below $500. During a conference call with investors last week, Cook played down reports Apple had reduced iPhone orders, insisting the company "is in one of the most prolific periods of innovation in its history". He said: "We rely on the same spirit and drive that brought the Mac and other revolutionary products like the iPod, iPhone and the iPad into the world."

But analysts say consumers are shifting away from the iPhone's 3.5-inch and 4-inch screens toward the 5-inch screens offered by companies such as Samsung, which saw its profits in the last quarter of 2012 surge 76 per cent, helped by sales of its Galaxy smartphones. Tellingly, demand has also been high for the Apple's earlier and cheaper smartphone models.