Following a significant production reduction at a China plant infected by a virus, Apple Inc. expects lower shipments of premium iPhone 14 models than previously anticipated, which will negatively impact its sales outlook for the busy holiday shopping season.
Apple has been kept afloat by demand for the high-end smartphones made at Foxconn’s Zhengzhou plant, which has been suffering from consumer spending cuts, rising inflation, and rising interest rates.
However, the zero-COVID-19 policy in China, which has caused international companies like Canada Goose Holdings Inc (GOOS.TO) and Estee Lauder Companies Inc (EL.N) to close local stores and lower forecasts, has victimized the Cupertino, California-based vendor.
“The facility is currently operating at significantly reduced capacity,” Apple said on Sunday without detailing the scale of the reduction.
“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 in a statement.
According to Reuters’ report from last month, COVID-19 restrictions may cause Foxconn’s Zhengzhou factory, one of the biggest in the world, to see a 30% drop in iPhone production in November.
A 200,000-person factory in central China has been rocked by unrest over strict measures to stop the spread of COVID-19, and many employees have left the facility.
Due to the factory’s problems, market research firm TrendForce last week reduced its estimate of iPhone shipments for the months of October through December from 80 million to 2 million to 3 million units. It also noted that its investigation revealed capacity utilisation rates of about 70%.
Customers should anticipate longer wait times, according to Apple, which started selling the iPhone 14 range in September.
“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.”
The second-largest economy in the world has been experiencing nationwide economic disruption since October, and China on Monday reported the highest number of new COVID-19 infections in six months. Health officials’ announcement over the weekend that they would maintain strict coronavirus curbs disappointed investors who were hoping for an easing.
In the meantime, Bloomberg News reported on Monday, citing people familiar with the plan, that Apple expects to produce at least 3 million fewer iPhone 14 handsets this year than planned due to weak demand for lower-end models.
The most valuable company in the world, with a market cap of $2.2 trillion, predicted last month that revenue growth from October through December would slow from the prior quarter’s 8%, though market observers viewed that favorably in a battered industry.
“Given that Apple reported only two weeks ago with positive guidance, we think this points to the potential for a longer and more severe lockdown,” Credit Suisse analysts said, expecting iPhone sales to be pushed to later quarters than lost.
According to their forecast, Apple’s revenue will increase by 3% this quarter, with iPhone sales rising by 2% to $73 billion.
With 70% of all shipments worldwide, Taiwan’s Foxconn is both the largest iPhone manufacturer and the largest contract electronics manufacturer in the world. It has iPhone production facilities in southern China and India, but its biggest is in the eastern Chinese province of Henan, in the city of Zhengzhou.
Recent comments made by local officials regarding COVID-19 cases at the plant. Foxconn has declined to share the number of infections or make any statements about the health of those who have been infected.
It stated on Monday that it was working to quickly restore full production at Zhengzhou. Foxconn’s goal, according to reports, is by the second half of November.
Foxconn announced that, at the local government’s request, it would put policies in place to prevent the spread of COVID-19, such as limiting employee movement to the space between their dormitory and the factory.
The manufacturer has also started a hiring drive, offering employees who left the plant between October 10 and November 5 a one-time bonus of 500 yuan ($69) if they came back. Additionally, salaries of 30 yuan per hour were advertised, which was more than the 17 to 23 yuan base pay that some employees told Reuters they received.
On Wednesday, the Zhengzhou Airport Economy Zone, which is home to the iPhone factory, went into a seven-day lockdown. Measures included prohibiting residents from leaving their homes and limiting access to authorized vehicles. The provincial government, according to Foxconn, “has made clear that it will, as always, fully support Foxconn.”
“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 announced on Monday that it will “revise down” its fourth-quarter earnings guidance after previously expressing “cautious optimism” in light of the Zhengzhou events.
For Taiwanese technology companies, the fourth quarter is typically a busy time as they scramble to meet demand for smartphones, tablets, and other electronics in time for the year-end holiday shopping season in Western markets.
On Nov. 10, Foxconn announces its third quarter financial results.
In comparison to a 1.5% increase in the benchmark index, the company, formerly known as Hon Hai Precision Industry Co Ltd, saw a 0.5% decline in share price on Monday.
(Adapted from Reuters.com)