Disruptions at Apple Inc.’s key manufacturing hub of Zhengzhou are likely to result in a production shortfall of close to 6 million iPhone Pro units this year, according to a Bloomberg report quoting people familiar with assembly operations.
The situation at the plant is still fluid, and the estimate of lost production could change, according to the person, who did not want to be identified because they were discussing private information. Much will depend on how quickly Foxconn Technology Group, the Taiwanese company that runs the facility, can return workers to the assembly lines following violent protests against Covid restrictions. If lockdowns continue in the coming weeks, production could be pushed back even further.
For weeks, the Zhengzhou campus has been plagued by lockdowns and worker unrest as Foxconn and the local government struggled to contain the Covid outbreak. Following chronic food shortages, thousands of employees fled in October, only to be replaced by new employees who rebelled against pay and quarantine practices.
The Foxconn facility manufactures the vast majority of Apple’s most popular handsets this year, the iPhone 14 Pro and Pro Max. Those premium phones have filled the void left by the decline in demand for regular iPhone 14 models. According to Bloomberg News, Apple reduced its overall production target from 90 million units to around 87 million units.
According to the Bloomberg report, Apple and Foxconn have increased their estimates of the Zhengzhou shortfall in the last two weeks due to growing disruptions, and they expect to make up the 6 million units in lost output in 2023.
“It demonstrates that everyone, even Apple, is susceptible to supply-chain constraints in China due to Covid,” said Anshel Sag of Moor Insights & Strategy.
The deficit, a significant shortfall for an operation that produces tens of millions of iPhones in advance of the peak holiday season, is among the most pessimistic of analysts’ forecasts. Analysts at Morgan Stanley estimated earlier this month that the iPhone Pro model would sell about 6 million units this year, but that was before the outbreak of violence in Zhengzhou last week.
Following the report, Apple shares fell as much as 1.9% on Germany’s Tradegate.
The upheaval in iPhone City, as the Zhengzhou complex is known, serves as a stark reminder of Apple’s reliance on China’s vast supply chain. Foxconn attempted to quell protests, which were largely fueled by new hires arriving in Zhengzhou and rejecting onerous Covid controls, by offering a bonus to any employees who chose to return home. It added a bonus of up to $1,800 per month for full-time employees who stay at the factory through December and January over the weekend.
The highly visible and unusual protests in Zhengzhou exacerbated an already difficult business climate. During peak iPhone production season, the massive complex can house up to 200,000 workers. More than 20,000 new hires are said to have left following the protests.
Another person familiar with assembly operations stated that the departure of new workers has less of an impact on production than the quarantines imposed on existing employees due to their experience and skill. Foxconn is actively recruiting new employees, with the assistance of government officials. The Taiwanese firm, China’s largest private-sector employer, has years of experience hiring tens of thousands of assembly workers, especially during peak season.
Apple and Foxconn, also known as Hon Hai Precision Industry Co., announced earlier this month that shipments of the company’s newest premium iPhones would be lower than expected due to China’s lockdowns, without providing any details.
Morgan Stanley analysts also ran a worst-case scenario for Apple and Foxconn, in which the Zhengzhou facility would be unable to ship any iPhones for the rest of the year. This would result in a 20% drop in expected sales for Hon Hai in the current quarter, according to analysts led by Sharon Shih in a research note published Nov. 7.
According to Amir Anvarzadeh, an analyst with Asymmetric Advisors, it is unavoidable that Apple and Foxconn will suffer as a result of China’s Covid policies. However, it is likely that it will encourage them to look for alternative manufacturing locations, such as India and Vietnam.
(Adapted from Bloomberg.com)