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

Disinfection at the Foxconn factory
to enlarge / ZHENGZHOU, CHINA – A staff member wearing personal protective equipment disinfects a factory in the Foxconn industrial park on November 6, 2022 in Zhengzhou, Henan Province, China.

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

The US tech giant has battled more than a month of chaos at its main assembler Foxconn’s megafactory in Zhengzhou, China, dubbed “iPhone City”, after the Covid-19 outbreak began in October.

According to research by Swiss bank UBS, Foxconn has moved some of its production to other factories across China, while Apple has worked with parts suppliers to reduce unusually long wait times. .

As the Chinese government reverses its zero-covid policy, a lingering threat now looms: the possibility of worker shortages at component plants or assembly factories across the country.

“We’re seeing a lot of operations affected by absenteeism, not just factories, but warehousing, distribution, logistics and transportation facilities,” said Bandia Vakil, chief executive of Reslink, a California-based group. 3 million components to provide supply chain mapping services.

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

The consensus among analysts is that the company’s revenue will fall short of the record $123.9 billion it earned in the same period last year, with net profit expected to fall more than 8 percent. is, according to a bank estimate by Visible Alpha. 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 had initially made forecasts for the next six months, assuming that unfinished orders would be postponed rather than cancelled.

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

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

Horace Dediu, an independent analyst at Asymco, a consultancy, said after Apple’s production and operational woes in recent months, a demand crisis could develop in China as consumers prioritize spending habits.

“Although the rest of the world saw an increase in demand during the lockdown, it was due to work-from-home and stimulus,” Didio said. “With fewer exemptions and fewer safety nets, Chinese consumers can avoid big purchases next year.”

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

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Prabhu Ram, head of the Industry Intelligence Group of Cyber ​​Media Research in Gurgaon, India, estimates that more than 7-8 percent of iPhones are assembled in India, and predicts that the three major Taiwanese suppliers of iPhones in India. Targeting 18 percent of the assembly. until 2024.

Alan Day, chair of State of Flux, a London-based supply chain consultancy, said China’s effort to eradicate the disease rather than control it has exposed the country’s assembly lines, which are the response to Covid. Working with the United Nations on corporate standards for giving. spread out

“The next two to six months are going to be a really critical moment for Apple’s supply chain, because of the immaturity of China’s handling of Covid,” Day said. “The rest of the world has developed standards, but China has been almost nonexistent in getting companies to adopt those standards.”

Additional reporting by Ryan McMorrow in Beijing.

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