Apple business under growing threat from Covid wave in China

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Apple’s business is under threat from a widespread outbreak of the coronavirus in China, with supply chain experts warning of a growing risk of months-long disruption of iPhone production.

The US tech giant has had to deal with more than a month of chaos at its flagship automaker Foxconn’s mega-factory in Zhengzhou, China, known as “iPhone City”, following a Covid-19 outbreak that began in October. .

Foxconn has shifted some of its production to other factories in China, while Apple has worked with component suppliers to alleviate unusually long wait times – about 23 days for customers buying high-end iPhones in the US, according to research by Swiss bank UBS. .

As the Chinese government reverses its Covid-zero policy, a more enduring risk now looms: the potential for worker shortages in component factories or assembly plants across the country.

“We must be seeing many operations being impacted by absenteeism, not just in factories, but also in warehouses, distribution, logistics and transportation facilities,” said Bindiya Vakil, chief executive of Resilinc, a California-based group that tracks more than 3 million components to provide supply chain mapping services.

Apple warned on November 6 of “significant” outages ahead of the holiday season. The rare announcement comes less than two weeks after executives forecast moderate sales growth in the crucial period around Christmas, down 8%.

The consensus among analysts is that the company’s revenues this quarter will fall just short of the record $123.9 billion reached in the same period last year, with net income projected to fall more than 8%, according to estimates. from the bank gathered by Visible Alpha. That would break a 14-quarter revenue growth streak as Apple grapples with a shortage of 5 million to 15 million iPhones.

Many analysts initially raised forecasts for the next six months, assuming backorders would be delayed rather than cancelled.

But risks to Apple’s 2023 revenues have increased as modeling has shown that 1 million Chinese people are at risk of dying from Covid during the coming winter months after President Xi Jinping removed strict pandemic controls. An Apple store in Beijing’s main shopping district had to cut hours last week because all of its employees were sick.

One-fifth of Apple’s revenue comes from sales in China, while more than 90% of iPhones are assembled there. Smartphone rival Samsung left China in 2019 and has diverse assembly in at least four countries.

Horace Dediu, an independent analyst at Asymco, a consultancy, said Apple’s production and operational problems in recent months could be followed by a demand slump in China as consumers prioritize spending habits.

“While the rest of the world saw demand pick up during the lockdowns, it was due to work from home and stimulus,” Dediu said. “With low immunity and minimal safety nets, Chinese consumers can hunker down and avoid big purchases next year.”

Apple’s most important Taiwanese suppliers, including Foxconn, Pegatron and Wistron, responded by looking to expand their emerging operations in India.

Prabhu Ram, head of CyberMedia Research’s industry intelligence group in Gurgaon, India, estimated that more than 7-8% of iPhones are being assembled in India and predicted that the big three Taiwanese suppliers intended for 18% of iPhone assembly to be done. in India by 2024.

China’s attempt to eradicate the disease rather than manage it has left the country’s assembly lines exposed, said Alan Day, president of State of Flux, a London-based supply chain consultancy that works with the UN on standards. corporate to respond to the Covid outbreaks.

“The next two to six months are really going to be a watershed moment for Apple’s supply chain given China’s immaturity in dealing with Covid,” Day said. “The rest of the world has developed standards, but China has been almost non-existent in getting companies to adopt those standards.”

Additional reporting by Ryan McMorrow in Beijing