Apple’s business under growing threat from China’s Covid wave

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

The U.S. tech giant had to deal with chaos at its main assembler Foxconn’s massive factory in Zhengzhou, China, known as “iPhone City,” after the Covid-19 outbreak that began in October.

Foxconn has shifted some production to other factories across China, while Apple is working with component suppliers to reduce unusually long wait times – according to research by Swiss bank UBS It takes about 23 days.

As the Chinese government begins to reverse its zero-Covid policy, a more enduring risk now looms — the potential for worker shortages at parts or assembly plants across the country.

“We should be seeing a lot of business being affected by absenteeism, not just in factories, but also in warehouses, distribution, logistics and transportation facilities,” said Bindiya Vakil, chief executive of California-based Resilinc Group, which tracks more than 300 workers. Wan provides components for supply chain mapping services.

Apple warned on Nov. 6 that there could be “significant” disruption ahead of the holiday season. The rare announcement comes less than two weeks after executives forecast anemic sales growth at or below 8% in the critical period around Christmas.

According to bank estimates compiled by Visible Alpha, the analyst consensus is that company revenue will fall slightly in the current quarter from the record $123.9 billion set a year earlier, with net income expected to drop more than 8%. If Apple were to experience a shortage of 5 million to 15 million iPhones, it would break a 14-quarter streak of revenue growth.

Many analysts initially raised their forecasts for the next six months, assuming that outstanding orders would be delayed rather than cancelled.

But the risks to Apple’s 2023 revenue have increased as models show that 1 million Chinese will die from COVID-19 in the coming months after Chinese President Xi Jinping rolled back strict epidemic control measures. Last week, an Apple store in Beijing’s main shopping district had to shorten its hours because all employees fell ill.

A fifth of Apple’s revenue comes from sales in China, where more than 90 percent of iPhones are assembled. Smartphone rival Samsung, which pulled out of China in 2019, now has diversified assembly in at least four countries.

Horace Dediu, an independent analyst at consultancy Asymco, said Apple could be experiencing a demand crisis in China following months of production and operational woes as consumers readjust their spending habits.

“While demand in the rest of the world has risen during the lockdown, it’s due to working from home and stimulus measures,” Dediu said. “Chinese consumers are likely to bow their heads next year and avoid big shopping due to weakened immunity and minimal safety nets.” pen purchase.”

Apple’s most important Taiwanese suppliers, including Foxconn, Pegatron and Wistron, have responded by seeking to expand their nascent Indian operations.

Prabhu Ram, head of the industry intelligence group at CyberMedia Research in Gurgaon, India, estimates that more than 7% to 8% of iPhones are assembled in India and predicts that Taiwan’s top three suppliers are targeting 18% of iPhone assembly in India. Completed. in India by 2024.

Alan Day, chairman of London-based supply chain consultancy State of Flux, said China’s attempts to eradicate the disease rather than manage it had left the country’s assembly lines exposed. The company has been working with the United Nations to develop corporate standards in response to the Covid outbreak.

“The next two to six months will really be a defining moment for Apple’s supply chain because China is immature in dealing with Covid,” Day said. “The rest of the world sets standards, but China has done little to get companies to accept them.”

Additional reporting by Ryan McMorrow in China

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