Apple supply chain braces for disruption from coronavirus outbreak
- Each of the main iPhone assembly locations in China is more than 500 kilometres away from Wuhan
- Apple’s preparations to begin mass production of a new low-cost iPhone could be at risk
Apple’s China-centric manufacturing base is at risk of disruption after the Lunar New Year holiday, as the iPhone maker’s partners confront the coronavirus outbreak that has gripped the country and caused more than 100 deaths.
Virtually all of the world’s iPhones are made in China, primarily by Foxconn Technology Group – formally known as Hon Hai Precision Industry, the world’s largest electronics contract manufacturer – at its so-called iPhone City in Zhengzhou and by Pegatron Corp at an assembly site near Shanghai. Each of those locations is more than 500 kilometres away from Wuhan in central China, the epicentre of the viral outbreak, but that distance does not immunise them from its effects.
“I can’t imagine a scenario where the supply chain isn’t disrupted,” said veteran industry analyst Patrick Moorhead of Moor Insights & Strategy. “If there’s one major hiccup in the raw materials, fabrication, assembly, test, and shipping, it will be a disruption.”
Apple has been increasing production to meet higher-than-anticipated iPhone demand, Bloomberg News reported last week. The company typically launches its new high-end iPhones around September, so the virus is unlikely to have meaningful impact on those plans.
The company, however, is also preparing to begin mass production of a new low-cost iPhone in February, which is more at risk.
Apple has roughly 10,000 direct employees in China, across its retail and corporate entities. Its supply chain also has a few million workers manufacturing products like the iPad, iPhone and Apple Watch.
“Supply chain disruption is a worry if employees across Foxconn and other component manufacturing hubs in China are restricted,” said analyst Dan Ives of Wedbush Securities. “If the China outbreak becomes more spread it could negatively impact the supply chain which would be a major investor worry.”
An Apple spokeswoman declined a request for comment.
Foxconn said it is monitoring the situation in China and following all recommended health practices. It declined to comment on production in specific locations but said, “We can confirm that we have measures in place to ensure that we can continue to meet all global manufacturing obligations.”
Confirmed cases of the coronavirus are rising in central China’s Henan province – home to Foxconn’s Zhengzhou facility – which may lead the Taiwanese contractor or the Chinese government to close factories to prevent further contamination, Bloomberg Intelligence analyst Matthew Kanterman wrote.
Henan accounted for a quarter of China’s smartphone exports last year, while the country’s exports make up 27 per cent of global smartphone sales, Kanterman said, citing government and IDC data. Foxconn is estimated to account for more than 60 per cent of Henan’s total trade.
Cupertino, California-based Apple prepares for extreme scenarios such as the coronavirus by mandating that major components be dual-sourced – both in terms of vendors and geography – and a major immediate impact to its production plans is unlikely for now, according to a person familiar with its operations.
Even so, the vast majority of its assembly work is done in China, and so a shortage of workers for assembly lines will have a direct impact on shipment numbers.
Apple put the redundancy policy in place after the 2011 earthquake and tsunami that hit Japan, which led to component constraints for the iPad 2 that the company launched that year.
While Apple does not have any stores in Wuhan, it does have dozens of retail locations across the Chinese mainland. While the company has not announced any closures yet, it has shortened the opening hours of several stores in the country through February 7, according to a review of its retail website. That shift followed the Chinese government’s decision to extend the Lunar New Year holiday as a means to control the spread of the coronavirus.
Along with its local workforce, Apple also relies on many of its US staff going back and forth across the Pacific Ocean, with United Airlines last year revealing the company was spending US$35 million a year flying employees between San Francisco and Shanghai alone. That included 50 daily business-class seats, according to the airline. How the virus outbreak may affect the research and development efforts that those trips facilitate has yet to be established.
Investors and analysts will be looking to Apple chief executive Tim Cook to make comments on the virus and its impact on the company during Tuesday’s conference call to discuss the latest quarterly financial results. Cook tweeted over the weekend that Apple “will be donating to groups on the ground helping support all of those affected” by the coronavirus.