Apple’s business is under increasing threat from the Chinese Covid wave

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

The US tech giant has had to deal with more than a month of chaos at its huge factory of its Foxconn main complex in Zhengzhou, China, known as “iPhone City”, in the wake of the 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 alleviate unusually long wait times — about 23 days for customers buying high-end iPhones in the US, according to research by Swiss bank UBS.

With the Chinese government reversing its “zero Covid” policy, a long-term danger now looms: the potential for worker shortages in component or assembly plants across the country.

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 a “significant” disruption ahead of the holiday season. The rare statement came less than two weeks after executives predicted weak 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 slightly from the record $123.9 billion it generated during the same period last year, with net profits expected to decline more than 8 percent, according to bank estimates compiled by Visible Alpha. This will break the streak of 14 quarters of revenue growth as Apple faces a shortage of between 5 million and 15 million iPhones.

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

But risks to Apple’s 2023 revenue increased as modeling showed one million Chinese were at risk of dying from Covid over the coming winter months after President Xi Jinping removed strict pandemic controls. An Apple store in Beijing’s main shopping district had to cut hours last week because all of its employees 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 Didio, an independent analyst at consulting firm Asymco, said Apple’s production and operational 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 pick up during the lockdowns, it was mainly because of work from home and stimulus,” Didio said. “With reduced immunity and minimal safety nets, Chinese consumers can hunker down and avoid large purchases next year.”

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

Prabhu Ram, head of industry intelligence group at CyberMedia Research in Gurgaon, India, estimated that upwards of 7-8 percent of iPhones are assembled in India, and predicted that the top three Taiwanese suppliers would be targeting 18 percent of iPhone assembly in India. By 2024.

China’s attempt to stamp out the disease rather than manage it has left the country’s assembly lines exposed, said Alan Day, head of State of Flux, a London-based supply chain consultancy working with the United Nations on corporate standards for the Covid response. disease 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 non-existent in convincing companies to adopt those standards.”

Additional reporting by Ryan McMurrah in Beijing.

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