By Tripp Mickle
Coronavirus has given new meaning to something Apple Inc.
executives have been saying for years: Apple needs another
China.
The rapid spread of the virus is the latest test of Apple's
dependency on the world's most populous nation, one that has
disrupted the supply chain for an array of products and fostered
uncertainty about future production.
The outbreak prompted China to keep many factories closed after
the Lunar New Year holiday that ended last weekend. Apple and
Foxconn Technology Co., the largest manufacturer of its devices,
have said production will resume after a 10-day delay on Feb. 10.
But signs are emerging that the impact on the companies is likely
to extend well beyond then, according to analysts and manufacturing
executives. Apple is expected to ship 5% to 10% fewer iPhones in
the current quarter, according to analysts.
An Apple spokeswoman declined to comment further.
Confirmed coronavirus cases have passed 24,000 and deaths have
reached at least 490, all but two in China. That exceeds the 349
who died in mainland China during the SARS crisis of 2002 and 2003.
The country continues to take aggressive measures to contain the
outbreak, all of which complicate global companies' efforts to keep
production flowing.
The uncertainty has disrupted China's economy. To curtail the
virus's spread, some local governments have asked people to stay
away from work. In some areas, only one person per household is
allowed to go out every two days to buy food and supplies.
Chief Executive Tim Cook has successfully weathered a number of
challenges that emerged around China in recent years. A weaker
economy and stronger local competition in China last year hurt
iPhone sales, triggering a stock-price decline that reached 10%
before market enthusiasm around new handsets sent shares surging. A
tariff war between China and the U.S. has loomed over the company
since 2018, although Mr. Cook persuaded President Trump to avert
serious damage to Apple.
The outbreak has the potential to hurt Apple in two ways:
cutting into sales in its second-most important market and roiling
a supply chain that relies on China to make most of the iPhones,
iPads and Macs sold world-wide.
The 10-day delay in production can be made up with overtime
work, said Dan Panzica, a former technology operations executive
with Foxconn. But he said shipments of parts and components to
factories could be delayed, and workers who went home to celebrate
the Lunar New Year may not return, out of caution.
"This is a much bigger impact than the Trump tariffs," Mr.
Panzica said. "Then you could move things. Now, you can't."
Apple is among the companies most vulnerable to the outbreak
because it hasn't diversified its manufacturing. Though in recent
years it looked at assembling iPhones outside China, including in
Vietnam, it found the costs of facilities and training too high and
opted to keep exporting most from China, The Wall Street Journal
previously reported.
Apple produces some iPhones in India, but has said that most are
sold domestically to avoid India's steep levies on imported
goods.
Samsung, the world's largest smartphone maker by shipments, last
year wound down production in China -- part of a years-old strategy
of diversifying its manufacturing base by shifting production to
India, Vietnam and elsewhere.
Huawei Technologies Co., the second-largest maker, this week
reopened its factory in the city of Dongguan, near Shenzhen, a
spokesman said, thanks to an exception the local government makes
for critical industries. The factory accounts for about 10% of the
company's output.
Apple's leaders have long considered its manufacturing reliance
on China both a strength and a vulnerability, according to former
executives. In general, Apple executives have worried more about a
disruption in exports from the country than a loss of sales inside
Greater China, a market that includes Hong Kong and Taiwan and
accounts for about a fifth of revenue.
Last week, Mr. Cook said Apple was developing plans to make up
for any lost production from Wuhan, the epicenter of the outbreak,
where the company says two of its top 200 suppliers are based. He
said it is harder to predict the consequences of the 10-day delay
in factory openings elsewhere.
Apple is in the process of ramping up production of an update to
the low-cost iPhone SE -- released in 2016 for $399 -- according to
analysts. It was expected to ship the phone in March but could
consider delaying that because of disruptions caused by the
epidemic, said Isaiah Research, a Taiwan-based firm focused on the
supply chain.
Foxconn is contending with a strict quarantine in Zhengzhou
city, home to its largest iPhone plant. The city, about 320 miles
north of Wuhan, has established single entry points at government,
commercial and residential buildings where people arriving have
their temperatures checked -- a policy that has stoked concern
inside Foxconn about whether it can resume production Feb. 10, a
person familiar with the matter said.
The contract manufacturer has said it plans to resume operations
at mainland plants Feb. 10. A committee led by its chairman is
dealing with the outbreak.
Apple is known for its operational prowess and has a record of
navigating supply-chain challenges. After a 2011 earthquake
triggered the Fukushima nuclear crisis in Japan, Apple created a
new factory outside the exclusion zone to maintain production of
optical drives it needed, according to a person familiar with the
matter. When monsoons flooded factories in Thailand later that same
year, Apple turned to the Thai Navy to load boats with the heavy
equipment it needed for production, the person said.
But those events only affected a sliver of Apple's supply chain.
The coronavirus in China affects the very heart of it.
Some have questioned whether enough workers will be available
for Apple to increase production, given that many traveled for the
Lunar New Year holidays and probably face limitations on their
mobility or even a quarantine.
"They'll open the doors but how many production operators will
return? How many line operators will return?" Mr. Panzica said. "It
won't be a typical smooth start."
Yang Jie and Dan Strumpf contributed to this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
February 05, 2020 09:07 ET (14:07 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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