Shutdowns and supply chain outages to accelerate Apple’s move away from China, with India a likely recipient, analysts say

Apple’s value chain in China, a symbol of the country’s global role as a source of labor and assembly, has been hit hard by severe shutdowns in Shanghai and neighboring provinces, increasing the risk that the US technology giant could accelerate its relocation. from China, analysts say.

Although it is difficult to put an exact figure on the losses due to the disruption of transportation and production along Apple’s extensive value chain in China, CFO Luca Maestri told a conference call on Thursday that Covid-1[ads1]9-related shutdowns and shortages. will reduce the company’s revenue by up to $ 8 billion in the June quarter.

Maestri said this was “significantly greater than” the impact in the previous quarter and also warned of the likely impact of reduced consumer demand in China due to shutdowns.

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Apple’s close ties with China have historically been supported by two main factors. First, the country is an ideal assembly center for the California-based technology giant, thanks to its advanced infrastructure, skilled workforce and efficient logistics services. Components from Taiwan, South Korea and elsewhere are assembled into iPhones and iPads on factory floors in China for worldwide purchase.

Second, China itself is the second largest market for Apple, thanks to the country’s growing middle class, which has become increasingly prosperous over the past decade, analysts say.

But this positive juxtaposition of factors is now threatened.

China’s severe shutdowns in Shanghai and Jiangsu provinces – key financial and manufacturing centers – since the end of March to tame the highly contagious Omicron variant of Covid-19 have cast doubt on its position as an integral part of Apple’s global supply chains.

The situation has become more acute for China given that other countries – especially Vietnam and India, which are returning to normal after Covid-related disruptions – are looking at a larger part of Apple’s value chain.

Shutdowns and supply chain outages to accelerate Apple’s move away from China, with India a likely recipient, analysts say

Apple CEO Tim Cook has maintained good relations with Beijing. Photo: EPA-EFE alt = Apple CEO Tim Cook has maintained good relations with Beijing. Photo: EPA-EFE>

According to calculations by South China Morning Postmore than half of Apple’s 192 suppliers with an in-house production site for the company, including Foxconn, Pegatron, Quanta, Wistron and Compal, have production facilities in shutdown-affected Shanghai and Jiangsu.

In addition, two Foxconn factories in Shenzhen had to shut down for several days in March in the middle of a local short shutdown, while the largest iPhone assembly in Zhengzhou has lacked manpower as Covid-19 restrictions have made it difficult for migrant workers from other areas to reach The Foxconn factory there.

For lesser-known suppliers or subcontractors in Apple’s value chain, it has been even more difficult to maintain normal operating levels. Foxconn had to shut down operations at two factories in Kunshan last week after a closed-circuit worker was found to be infected with Covid-19.

Ming-Chi Kuo, an analyst at TF Securities who follows Apple, said shutdowns in the Yangtze River Delta region would lead to a 30 to 40 percent drop in shipments this quarter for Apple, although the deficit could be reduced to 15 to 25 percent if other suppliers enter.

Delivery times for Apple MacBook Pros have been delayed by up to five weeks as the only installer, Quanta, has been forced to shut down due to the Shanghai blockade, Kuo said.

Apple had already begun considering reducing its dependence on China, but the recent shutdowns have accelerated the process, Kuo said. Moving some production facilities from China is “no longer a proposal, but an action plan”, Kuo added.

Apple did not immediately respond to a request for comment on plans for China in the face of shutdown-related disruptions.

The Covid-19 blockades come at a time when geopolitical pressure is mounting for an economic decoupling between China and the United States.

Former United States President Donald Trump has been pushing for a return to US production, and the Biden administration has been working with regional allies to reduce supply chain dependence on China.

Two of Foxconn’s four campuses in Kunshan, north of the city, were closed on April 20 after the Apple vendor reported confirmed Covid cases. Photo: SCMP / Ann Cao alt = Two of Foxconn’s four campuses in Kunshan, north of the city, went into strict block on April 20 after the Apple vendor reported confirmed Covid cases. Photo: SCMP / Ann Cao>

Apple, under CEO Tim Cook, has maintained a steady relationship with Beijing despite some sporadic consumer boycotts of Apple products in China. Cook chairs the Financial Management School’s advisory committee at Tsinghua University, which gives him access to China’s national leaders.

Technical media The information reported at the end of last year that Cook signed an agreement with Chinese officials, estimated to be worth around $ 275 billion, to help China develop its technological prowess and to avert government action that would have hindered Apple’s units and services in the country. .

In Thursday’s conference call, Cook said Apple is likely to move more production capacity back to the United States given the ongoing challenges. “Our supply chain is really global … we do a lot in the US, and we’ll probably do even more here as more pieces are produced here,” he said without giving further details.

Other options for Apple may include India, where land and labor are much cheaper than in the United States. With roads and ports clogged in China due to shutdowns, iPhone production in India increased by 50 percent year-on-year in the first quarter of 2022. This was helped by a decision to assemble the iPhone 13 at a Foxconn plant near Chennai, according to Indian media.

And China remains critically important to Apple as a consumer market.

“Growth in China is still the fuel of the engine [for Apple]”I Danves and John Katsingris, analysts at New York-based Wedbush, wrote in a recent research report. But analysts added that supply chain problems have already cut sales of around 15 million iPhone units in recent quarters.

Meanwhile, there is little indication that China is about to give up its “dynamic zero” policy approach to Covid-19. For the industrial companies that are allowed to resume production, strict quarantine rules remain in place, which can lead to additional costs, reduced efficiency and new uncertainty.

“The best case [for full resumption] is June, “Kuo said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice that has reported on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit SCMP’s Facebook and Twitter sides. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.

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