Big trouble for Apple as China lockdowns hit iPhone production

Apple expects lower shipments of high-end iPhone 14 models than previously anticipated following a significant production cut at a virus-blighted plant in China, dampening its sales outlook for the year-end holiday season.

Solid demand for the new iPhones has helped Apple remain a rare bright spot in the global tech sector that has been battered by spending cutbacks due to surging inflation and interest rates.

But the Cupertino, California-based company has now fallen victim to China’s rigorous Zero Covid policy, which has already prompted many global firms including Estee Lauder Companies and Canada Goose Holdings to shut their stores in China and cut full-year forecasts.

“The facility is currently operating at significantly reduced capacity,” Apple said in a statement on Sunday without elaborating how much production has been impacted.

“We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated,” it said.

Reuters last month reported that production of Apple’s iPhones could slump by as much as 30% at one of the world’s biggest factories in November due to tightening Covid-19 curbs in China.

Its main Zhengzhou plant in central China, which employs about 200 000 people, has been rocked by discontent over stringent measures to curb the spread of Covid-19, with many workers fleeing the site.

Longer wait times

Market research firm TrendForce said last week it has cut its iPhone shipments forecast for the December quarter by two to three million units, from 80 million previously, due to the troubles at the Zhengzhou plant, adding that its investigation of the situation found that the factory’s capacity utilisation rates were now around 70%.

Apple, which launched sales of the new iPhones in September, said customers will experience longer wait times to receive their new products.

The world’s most valuable company with a market capitalisation of US$2.2-trillion forecast in October its revenue growth would fall below 8% in the December quarter.

“Anything that affects Apple’s production obviously affects their share price,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.

“But this is part of a much deeper story — the uncertainty surrounding the future of the Chinese economy… These headlines are part of the ongoing saga as to whether there is any truth to the consistent rumours that authorities are discussing whether some of the measures will be lifted in the first quarter.”

China on Sunday reported its highest number of new Covid-19 infections in six months, a day after health officials said they were sticking with strict coronavirus curbs, likely disappointing recent investor hopes for an easing.

Taiwan’s Foxconn, the operator of the Zhengzhou factory, said on Monday it was working to resume full production at the plant as soon as possible, and revised down its fourth quarter outlook.

It said it would implement new measures at the plant to curb the spread of Covid-19, including a system that would restrict working employees’ travel to between their dormitory and factory area.

The plant also kicked off a recruitment drive on Monday, offering workers who had left the plant between 10 October and 5 November a one-off bonus of C¥500 (R1 242) should they choose to return. It also advertised salaries of C¥30/hour, higher than the C¥17-23/hour base salaries that some workers said they received.

Shares in Foxconn fell 0.5% in early trade on Monday, lagging a 1.2% rise in the broader index.

Read: Apple steps up production shift from China to India

The Zhengzhou Airport Economy Zone which houses the iPhone factory entered a seven-day lockdown on Wednesday whose measures included barring all residents from going out and only allowing approved vehicles on roads within that area.

Foxconn, the world’s largest contract electronics maker, said in a statement that the provincial government in Henan, where Zhengzhou is located, “has made it clear that it will, as always, fully support Foxconn in Henan”.

Read: Apple will move iPhone to USB-C to comply with EU law

“Foxconn is now working with the government in concerted effort to stamp out the pandemic and resume production to its full capacity as quickly as possible.”

Foxconn, formally Hon Hai Precision Industry, is Apple’s biggest iPhone maker, accounting for 70% of iPhone shipments globally. It has other smaller production sites in India and southern China.  — Ben Blanchard, Caroline Valetkevitch and Jaiveer Shekhawat, with Brenda Goh, (c) 2022 Reuters

Get the latest and best South African tech news