Apple warns of lower iPhone shipments as COVID hampers China plant

TAIPEI, Nov 7 (Reuters) – Apple Inc ( AAPL.O ) expects lower-than-expected shipments of premium iPhone 14 models after a significant production cut at a virus-hit factory in China, dampening sales prospects for the busy year-end holiday season.

Demand for high-end smartphones assembled at Foxconn’s ( 2317.TW ) Zhengzhou factory has helped Apple remain a bright spot in a technology sector hit by cuts in consumer spending amid rising inflation and interest rates.

But the Cupertino, Calif.-based supplier has fallen victim to China’s zero-covid-19 policy, which has seen global firms including Canada Goose Holdings Inc ( GOOS.TO ) and Estee Lauder Companies Inc ( EL.N ) shut down local shops and cut forecasts.

“The facility is currently operating at significantly reduced capacity,” Apple said Sunday without detailing the extent 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 expected,” it said in a statement.

Reuters reported last month that iPhone production could fall as much as 30% in November at Foxconn’s Zhengzhou factory – one of the world’s largest – due to COVID-19 restrictions.

The factory in central China, which employs around 200,000 people, has been rocked by discontent over strict measures to curb the spread of COVID-19, with many workers fleeing the site.

Market researcher TrendForce last week cut its October-December iPhone shipment forecast by 2 million to 3 million units, from 80 million, due to factory problems, adding that its survey found capacity utilization at around 70%.

Apple, which began selling its iPhone 14 series in September, said customers should expect longer wait times.

“Anything that affects Apple’s production obviously affects their stock price,” said Quincy Krosby, global chief 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 of whether there is any truth to the consistent rumors that the authorities are debating whether any of the measures will be repealed in the first quarter.”

China on Monday reported its highest number of new COVID-19 infections in six months, with disruptions to the world’s second-largest economy spreading across the country since October. Over the weekend, health officials said they would stick to strict curbs on the coronavirus, disappointing investors hoping for relief.

Meanwhile, Apple expects to produce at least 3 million fewer iPhone 14 phones this year than planned because of weak demand for lower-end models, Bloomberg News reported Monday, citing people familiar with the plan.

The world’s most valuable firm, with a market value of $2.2 trillion, forecast last month that October-December revenue growth would slow from the previous quarter’s 8% – although market watchers viewed it as positive in a vulnerable sector.

“Given that Apple reported just two weeks ago with positive guidance, we believe 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.

They estimated that Apple’s revenue will increase 3% in the current quarter, with iPhone sales growing 2% to $73 billion.

FOXCONN CUT THE OUTLOOK

Taiwan’s Foxconn is the world’s largest contract electronics manufacturer and Apple’s largest iPhone maker, accounting for 70% of shipments globally. It has iPhone manufacturing sites in India and southern China, but the largest is in the city of Zhengzhou in the eastern Chinese province of Henan.

Local officials recently commented on cases of COVID-19 at the facility. Foxconn has declined to disclose the number of infections or comment on the conditions of those infected.

On Monday, it said it was working to resume full production in Zhengzhou as soon as possible. A person familiar with the matter told Reuters that Foxconn’s target is by the second half of November.

At the request of the local government, Foxconn said it would take measures to curb the spread of COVID-19, including limiting employee movement to between the dormitory and the factory area.

The manufacturer has also started a recruitment drive, offering workers who left the factory between October 10 and November 5 a one-time bonus of 500 yuan ($69) if they return. It also announced wages of 30 yuan an hour, higher than the basic wages of 17 to 23 yuan that some workers told Reuters they received.

The Zhengzhou Airport Economy Zone, which houses the iPhone factory, went into a seven-day lockdown on Wednesday with measures including barring residents from going outside and allowing access only to approved vehicles. read more

Foxconn said the provincial government “has made it clear that, as always, it will fully support Foxconn”.

“Foxconn is now working with the government in a joint effort to eradicate the pandemic and resume production at full capacity as quickly as possible.”

After previously expressing “cautious optimism” in its fourth-quarter guidance, Foxconn said Monday it will “revise down” its outlook given the events in Zhengzhou.

The fourth quarter is traditionally a hot season for Taiwanese technology companies as they race to supply smartphones, tablets and other electronics for the end-of-year Christmas shopping in Western markets. Foxconn publishes its results for the third quarter on November 10.

The firm, formally Hon Hai Precision Industry Co Ltd, saw its share price fall 0.5% in Monday trading, against a 1.5% gain in the benchmark index (.TWII).

($1 = 7.2135 Chinese Yuan Renminbi)

Reporting by Ben Blanchard and Sarah Wu in Taipei, Caroline Valetkevitch in New York and Jaiveer Shekhawat in Bengaluru; Additional reporting by Brenda Goh; Writer Miyoung Kim; Editing by Daniel Wallis and Christopher Cushing

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