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

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

The US tech giant has faced more than a month of chaos at its main manufacturer Foxconn’s megafactory in Zhengzhou, China, known as “iPhone City”, following a Covid-19 outbreak that began in October.

Foxconn has moved some of its production to other factories across China, while Apple has worked with component suppliers to ease 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 zero-Covid policy, a longer-term risk now looms: the potential for worker shortages at component plants or assembly factories across the country.

“We should see a lot of operations affected by absenteeism, not just at factories, but also warehousing, distribution, logistics and transportation facilities,” said Bindiya Vakil, CEO of Resilinc, a California-based group that has more than 3 million components to provide supply chain mapping services.

On Nov. 6, Apple warned of “significant” disruption ahead of the holiday season. The rare statement comes less than two weeks after executives forecast subdued sales growth in the crucial period around Christmas, of less than 8 percent.

The consensus among analysts is that company revenue this quarter will fall just short of the record $123.9 billion it achieved in the same period last year, with net profit expected to tumble more than 8 percent, according to bank estimates provided by Visible Alpha has been merged. That would break a 14-quarter streak of revenue growth as Apple faces a shortfall of between 5 million and 15 million iPhones.

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

But the risks to Apple’s revenue for 2023 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 lifted strict pandemic controls. One Apple store in Beijing’s main shopping district had to cut hours last week because all its workers were sick.

A fifth of Apple’s revenue comes from sales in China, while more than 90 percent of iPhones are assembled there. Smartphone rival Samsung exited China in 2019 and has diversified assembly in at least four countries.

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

“Although the rest of the world saw demand increase during lockdowns, it was due to work-from-home and stimulus,” Dediu said. “With low immunity and minimal safety nets, Chinese consumers may regress and avoid large purchases next year.”

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

Prabhu Ram, head of the industry intelligence group at CyberMedia Research in Gurgaon, India, estimated that more than 7-8 percent of iPhones are assembled in India, and predicted that the big three Taiwanese suppliers account for 18 percent of iPhone assembly in India aims. by 2024.

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

“The next two to six months will really be a defining moment for Apple’s supply chain, because of 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.

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