Weeks after expressing optimism about the global economy and its operations, Apple warned on Sunday that sales would fall short of expectations as a major iPhone factory in China was shut down by a coronavirus outbreak.
The abrupt change in the business outlook is the latest reminder of the risks posed by the company’s concentrated manufacturing supply chain in China. Once an operating force that gave Apple the flexibility to let legions of workers use iPhones to meet global demand, its reliance on China has become a liability as the country’s commitment to a zero-Covid-19 policy has made it necessary. led it to shut down cities, businesses and factories.
In mid-October, Apple’s largest iPhone maker, Foxconn, closed its primary factory in Zhengzhou as the number of coronavirus cases rose. Foxconn closed off the facility to the outside world and walled off approximately 200,000 workers on the property. iPhone production has continued at “significantly reduced capacity,” Apple said in a statement on Sunday. The company added that the production issues would mean customers would experience longer wait times between purchase and delivery of the high-quality iPhone 14 Pro and 14 Pro Max.
“We are working closely with our supplier to return to normal production levels while ensuring the health and safety of every employee,” Apple said in its statement.
The shutdown is the second to hit Apple this year. It lost about $4 billion in sales of iPads and Macs in the spring and summer after factories outside Shanghai closed to limit the spread of Covid-19.
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Apple’s setback comes amid a larger slump in the outlook for the tech industry. Shares of Alphabet, Amazon and Meta have fallen this year amid an economic slowdown that has caused e-commerce and advertising sales to falter. Apple’s stock prices have fallen, but have largely avoided the sharp declines of its competitors as it continued to deliver strong business results.
China’s zero-tolerance approach to Covid-19 has been promoted by China’s top leader, Xi Jinping. The country’s leadership has remained committed to that policy following Mr Xi’s election for a third term.
Apple’s presence in China is so prominent that locals refer to Zhengzhou as “iPhone City.” At full capacity, the Foxconn factory there could produce 500,000 iPhones per day. It is the largest single factory for the iPhone, accounting for more than half of Apple’s annual sales.
“This is what Apple was afraid of,” said Wayne Lam, a technology analyst at CCS Insight. “China is not letting go of this zero Covid policy, and it will have a big impact because these premium phones were the last part of the smartphone market that was in high demand.”
After Foxconn shut down its factory in Zhengzhou, some factory workers fled the factory and began walking across the countryside to their homes. Images and videos of those fleeing, spread across social media. Leo Lin, a 29-year-old factory worker who spoke to The New York Times last week, said many workers panicked when the quarantine facilities overflowed.
Foxconn responded by offering employees an additional $14 per day to continue working. It later increased those payments to $55 per day.
Apple has begun to diversify its supply chain outside of China, moving production of some iPhones to India and other products to Vietnam. But the company still relies on China to manufacture more than 90 percent of the iPhones it sells, analysts said.
The pressure to diversify is “obviously not fast enough,” Mr Lam said.
