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 several months of disruption to production of iPhones.

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

Foxconn has moved some of its production to other factories across China, while Apple has been working with component suppliers to alleviate unusually long wait times — about 23 days for customers buying high-end iPhones in the United States, according to research by Swiss bank UBS.

Like the Chinese government is changing its zero-Covid policya longer-term risk now looms: the potential for labor shortages at component factories or assembly plants across the country.

“We should see a lot of operations being affected by absenteeism, not just in factories but also in warehousing, distribution, logistics and transportation facilities,” said Bindiya Vakil, CEO 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” disruption ahead of the holiday season. The rare statement came less than two weeks after executives predicted muted sales growth in the crucial period around Christmas, of less than 8 percent.

The consensus among analysts is that the company’s 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 fall more than 8 percent, according to banking estimates compiled by Visible Alpha . That would break a 14-quarter streak of revenue growth as Apple faces a shortage of between 5 and 15 million iPhones.

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

But risks to Apple’s 2023 earnings have increased as modeling has shown 1 million Chinese are at risk of dying from Covid over the coming winter months after President Xi Jinping lifted strict pandemic controls. An Apple store in Beijing’s main shopping district had to cut working 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 competitor Samsung exited China in 2019 and has diversified assembly in at least four countries.

Horace Dediu, an independent analyst at Asymco, a consulting firm, said Apple’s production and operating problems in recent months could be followed by a demand crisis in China as consumers re-prioritize 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 could buckle down and avoid big purchases next year.”

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

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

China’s attempt to eradicate the disease rather than manage it has left the country assembly line exposedsaid Alan Day, chairman of State of Flux, a London-based supply chain consultancy that has worked with the United Nations on corporate standards for responding to the Covid outbreak.

“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 nonexistent in getting companies to embrace those standards.”

Additional reporting by Ryan McMorrow in China

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