Analysts say shutdowns and supply chain disruptions are accelerating Apple’s move away from China, with India a potential beneficiary

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 strict lockdowns in Shanghai and neighboring provinces, raising the risk that the US tech giant will accelerate the shift of its operations away. From China, analysts say.

While it is difficult to pinpoint an exact figure for losses from transportation and production disruptions along Apple’s overall value chain in China, Chief Financial Officer Luca Maestri said on a conference call Thursday that the Covid-19-related shutdowns and chip shortages will reduce the company’s revenue including Reaches $8 billion in the June quarter.

Maestri said this was “much larger than” the impact in the previous quarter and also warned of the potentially harmful impact of reduced consumer demand in China due to the lockdown.

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

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

But this positive alignment of factors is now under threat.

The strict lockdown imposed by China in Shanghai and Jiangsu province – key financial and manufacturing centers – since the end of March to tame the highly contagious Omicron variant of Covid-19 has raised doubts about the country’s place as an integral part of Apple’s global supply chains. .

The situation is becoming more acute for China given that other countries – particularly Vietnam and India, which are back to normal after the Covid-related turmoil – are eyeing a greater share of Apple’s value chain.

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

According to the calculations South China Morning Newspapermore than half of Apple’s 192 suppliers with an in-house manufacturing site for the company, including Foxconn, Pegatron, Quanta, Wistron and Compal, have production facilities in Shanghai and Jiangsu that have been shut down.

Moreover, two Foxconn factories in Shenzhen were forced to suspend operations for several days in March amid a brief local shutdown, while the largest iPhone assembly complex in Zhengzhou was suffering from a labor shortage as Covid-19 restrictions made it difficult for migrant workers from regions Others do this. Get to the Foxconn factory there.

For less well-known suppliers or subcontractors in the Apple value chain, it has been more difficult to maintain normal operating levels. Foxconn was forced to suspend operations at two plants in Kunshan last week after one closed-loop worker was found to have contracted the Covid-19 virus.

Ming-Chi Kuo, an analyst at TF Securities who tracks Apple, said the shutdowns in the Yangtze River Delta would roughly result in a 30 to 40 percent drop in Apple shipments this quarter, though the shortfall could narrow to 15 to 25 in cent if other suppliers intervene.

Kuo said Apple MacBook Pro delivery dates were delayed by up to five weeks as the sole assembly company, Quanta, was forced to suspend operations due to the Shanghai shutdown.

Kuo said Apple has already begun to consider reducing its dependence on China, but the recent shutdowns have accelerated the process. Koo added that moving some production facilities from China “is no longer a proposal but a plan of action.”

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

The Covid-19 lockdown comes at a time of mounting geopolitical pressure for economic decoupling between China and the United States.

Former US President Donald Trump pushed to recycle US manufacturing and the Biden administration is working with regional allies to reduce the supply chain’s dependence on China.

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

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

tech media port the information It was reported at the end of last year that Cook signed an agreement with Chinese officials, valued at about $275 billion, to help China develop its technological prowess and avoid government actions that would have hampered Apple devices and services in the country.

In a conference call on Thursday, Cook said Apple is likely to bring 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 maybe we will do more here as more chips are produced here,” he said, without going into further details.

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

China is still very important to Apple as a consumer market.

China’s growth remains the fuel in the engine [for Apple], Dan Ives and John Katsingris, analysts at Wedbush, based in New York, wrote in a recent research report. But analysts added that supply chain problems have already cut off the sale of about 15 million iPhone units over the past few quarters.

Meanwhile, there are few signs that China is about to abandon its “dynamic zero” policy approach to Covid-19. For industrial enterprises that are allowed to resume production, strict quarantine rules remain in place, which can translate into additional costs, reduced efficiency and new uncertainties in the future.

Best case [for full resumption] Koo said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative audio report on China and Asia in over a century. For more SCMP stories, please explore the SCMP app or visit Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. all rights are save.

Copyright (c) 2022. South China Morning Post Publishers Ltd. all rights are save.

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