January 27, 2023

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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 iPhone production being disrupted for months.

The US tech giant has had to deal with more than a month of chaos at its main assembler 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 across China, while Apple has been working with component suppliers to reduce unusually long wait times — around 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-lasting risk now looms: potential labor shortages at component plants or assembly plants across the country.

“We should see many operations being impacted by absenteeism, not just in factories but also in warehousing, distribution, logistics and transportation facilities,” said Bindiya Vakil, chief executive of the Resilinc, Calif.-based group, which reads more than 3 million tracks components to provide supply chain mapping services.

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

Analysts agree that company revenue this quarter will fall just short of the record $123.9 billion it generated in the same period last year, with net profits likely to fall by more than 8 percent, according to Visible Alpha bank estimates percent will decrease. That would break a 14-quarter sales growth streak as Apple faces a shortage of between 5 million and 15 million iPhones.

Many analysts had initially raised their forecasts for the next six months and assumed that unfulfilled orders would be postponed rather than cancelled.

But risks to Apple’s 2023 earnings have increased as models have shown 1 million Chinese are at risk of dying from Covid in the coming winter months after President Xi Jinping lifted tight pandemic controls. An Apple store in Beijing’s main shopping district had to reduce its opening hours last week because all of its employees were ill.

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

Horace Dediu, an independent analyst at Asymco, a consulting firm, said Apple’s manufacturing and operational problems in recent months could be followed by a demand crisis in China as consumers reprioritize their spending habits.

“Although the rest of the world saw an increase in demand during the lockdown, this was due to work from home and incentives,” Dediu said. “With low immunity and minimal safety nets, Chinese consumers could pull back and avoid big purchases next year.”

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

Prabhu Ram, head of Industry Intelligence Group at CyberMedia Research in Gurgaon, India, estimates that more than 7-8 percent of iPhones are assembled in India and predicts that the big three Taiwanese suppliers are targeting 18 percent of iPhone assembly in India until 2024.

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

“The next two to six months will really be a pivotal moment for Apple’s supply chain as China is still immature on how to deal with Covid,” Day said. “The rest of the world developed standards, but China has been almost nonexistent when it comes to getting companies to adopt those standards.”

Additional reporting by Ryan McMorrow in China