Apple has a big problem at Foxconn’s iPhone factory in China

Hong Kong
CNN Business
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A violent worker revolt at the world’s biggest iPhone factory this week in central China is further disrupting Apple’s strained supply and highlighting how the country̵[ads1]7;s strict zero-Covid policy is hurting global technology companies.

The trouble started last month when workers left the factory campus in Zhengzhou, the capital of central Henan province, over Covid fears. With staff shortages, bonuses were offered to workers to return.

But protests erupted this week when newly hired staff said management had reneged on its promises. The workers, who clashed with security officers wearing hazmat suits, were eventually offered cash to quit and leave.

Analysts said the troubles facing Taiwanese contract manufacturing firm Foxconn, a top Apple supplier that owns the facility, will also speed up its diversification away from China to countries such as India.

Daniel Ives, managing director of equity research at Wedbush Securities, told CNN Business that the ongoing production shutdown at Foxconn’s sprawling campus in the central Chinese city of Zhengzhou was an “albatross” for Apple.

“Each week of this shutdown and turmoil we estimate is costing Apple approximately $1 billion a week in lost iPhone sales. Now about 5% of iPhone 14 sales are probably off the table because of these brutal shutdowns in China, he said.

Demand for iPhone 14 units during the Black Friday weekend was much higher than supply and could cause large shortages leading up to Christmas, Ives said, adding that the disruption at Foxconn, which began in October, has been a major “gut punch” for Apple this quarter.

In a note Friday, Ives said Black Friday store checks show large iPhone shortages across the board.

“Based on our analysis, we believe the iPhone 14 Pro shortage has gotten much worse over the past week with very low inventory,” he wrote. “We believe many Apple stores now have iPhone 14 Pro shortages … of up to 25%-30% below normal heading into a typical December.”

Ming-Chi Kuo, analyst at TF International Securities, wrote on Twitter that more than 10% of global iPhone production capacity was affected by the situation at the Zhengzhou campus.

Earlier this month, Apple said shipments of its latest range of iPhones would be “temporarily affected” by Covid restrictions in China. It said the Zhengzhou assembly plant, which normally houses about 200,000 workers, “is currently operating at significantly reduced capacity,” due to Covid curbs.

The Zhengzhou campus has been struggling with a Covid outbreak since mid-October that caused panic among workers. Videos of people leaving Zhengzhou on foot went viral went viral on Chinese social media in early November, forcing Foxconn to step up measures to bring employees back.

To entice workers, the company said it had quadrupled daily bonuses for workers at the plant this month. A week ago, state media reported that 100,000 people had been recruited to fill the vacancies.

But on Tuesday evening, hundreds of workers, mostly new hires, began protesting against the terms of the pay packages offered to them and also against their living conditions. Scenes became increasingly violent into the next day as workers clashed with large numbers of security forces.

By Wednesday evening the crowds had fell silent, with protesters returning to their dormitories on the Foxconn campus after the company offered to pay the newly recruited workers 10,000 yuan ($1,400), or about two months’ wages, to quit and leave the site entirely.

In a statement sent to CNN Business on Thursday after the protests had ended, Apple said it had a team on the ground at the Zhengzhou plant in close cooperation with Foxconn to ensure that employee concerns were addressed.

Even before this week’s demonstrations, Apple had begun making the iPhone 14 in India as it sought to diversify its supply chain away from China.

The announcement in late September marked a major shift in strategy and came at a time when US technology companies were looking for alternatives to China, the factory of the world for decades.

The Wall Street Journal reported earlier this year that the company was looking to increase production in countries such as Vietnam and India, citing China’s strict Covid policies as one of the reasons.

Kuo said on Twitter that he thought Foxconn would do it accelerate the expansion of iPhone manufacturing capacity in India as a result of the Zhengzhou shutdowns and resulting protests.

Production of iPhones by Foxconn in India will grow by at least 150% in 2023 compared to 2022, he predicted, and the long-term goal would be to ship between 40% and 45% of such phones from India, compared with less than 4% now.

— Chris Isidore contributed to this report.