Apple's business is becoming more and more exposed to China's Covid wave
A large-scale coronavirus epidemic in China is threatening Apple's operations, and supply chain specialists have warned of an increasing possibility of months-long disruptions to iPhone production.
Following a Covid-19 epidemic that began in October, the US tech giant has had to deal with more than a month of disruption at its primary assembler Foxconn's megafactory in Zhengzhou, China, dubbed as "iPhone City."
While Apple has worked with component suppliers to reduce exceptionally lengthy wait times—about 23 days for customers buying high-end iPhones in the US, according to research by Swiss bank UBS—Foxconn has relocated part of its manufacturing to other plants around China.
A longer-term concern now exists as the Chinese government reverses its zero-Covid policy: the potential for workforce shortages at component facilities or assembly factories around the nation.
According to Bindiya Vakil, chief executive of Resilinc, a California-based company that tracks more than 3 million components to provide supply chain mapping services, "We should be seeing a lot of operations get impacted by absenteeism, not just at factories but also at warehouse, distribution, logistic, and transportation facilities."
On November 6, Apple issued a "major" disruption alert ahead of the holiday shopping season. Less than two weeks before, management had issued an uncommon estimate calling for sales growth in the key run-up to Christmas to fall below 8%.
Analysts predict that this quarter's corporate revenues will be slightly below the record $123.9 billion they reached during the same time last year, and that net profits would decline by more than 8%, according to bank projections compiled by Visible Alpha. As Apple is now experiencing a shortfall of between 5 million and 15 million iPhones, it would end a 14-quarter sales growth run.
Assuming that unfilled orders would be delayed rather than canceled, several experts had initially upped their predictions for the upcoming six months.
However, as a result of President Xi Jinping relaxing rigorous pandemic regulations, modeling has revealed that 1 million Chinese citizens are at risk of dying from COVID over the upcoming winter months, increasing the threats to Apple's profits for 2023. Due to employee sickness, one Apple store in Beijing's main retail area had to reduce hours last week.
More than 90% of iPhones are made in China, where sales account for a fifth of Apple's total income. Samsung, a competitor in the smartphone market, left China in 2019 and now assembles in at least four other nations.
According to Horace Dediu, an independent analyst at the consulting firm Asymco, Apple's recent manufacturing and operational problems might be followed by a crisis in China's demand as consumers reevaluate their spending priorities.
Although the rest of the globe experienced an increase in demand during lockdowns, Dediu attributed it to work-from-home policies and the stimulus. Chinese consumers may choose to forego major purchases in the coming year due to their poor immunity and inadequate safety nets.
Foxconn, Pegatron, and Wistron, three of Apple's most significant Taiwanese suppliers, have responded by looking to grow their embryonic Indian businesses.
Upwards of 7-8% of iPhones are reportedly produced in India, according to Prabhu Ram, director of the industry intelligence department at CyberMedia Research in Gurgaon, India. He also forecasted that the major Taiwanese suppliers planned to have 18% of iPhone assembly in India by 2024.
According to Alan Day, chair of State of Flux, a London-based supply chain consultancy that has been working with the UN on corporate guidelines for reacting to Covid outbreaks, China's determination to eradicate the illness rather than manage it has exposed the nation's production lines.
Due to China's inexperience with managing Covid, the next two to six months will be a turning point for Apple's supply chain, according to Day. The rest of the world has created standards, but China has done virtually little to encourage business use of such standards.