Apple (APPL) is facing one of its biggest operational challenges in years, as protests in China roil the tech giant’s supply chain during the holiday shopping season.
According to Bloomberg, Apple supplier Foxconn will produce 6 million fewer iPhone units than anticipated as employees at the manufacturer’s Zhengzhou-based facility demonstrated against China’s ongoing zero-COVID policy. Workers at the 200,000-person plant have called out the policy’s strict lockdowns, complaining about, among other things, a lack of adequate food supplies at the factory.
Shares of Apple closed down more than 2.5% Monday.
The protests come as citizens in other Chinese cities rally against the government’s severe COVID restrictions.
For Apple, the protests mean fewer consumers will be able to get their hands on iPhones during the crucial shopping season. More concerning for the tech giant, however, is the fact that the Zhengzhou facility produces the bulk of Apple’s iPhone 14 Pro and iPhone 14 Pro Max models, which start at $999 and $1,199, respectively.
The iPhone 14 Pro and Pro Max feature better cameras, improved displays, and faster processors than their less expensive stablemates, the $799 iPhone 14 and the $899 iPhone 14 Plus. Apple outfitted the iPhone 14 Pro models with more appealing features in the hopes that doing so would increase the company’s average iPhone selling price, providing a boost to overall revenue.
But the COVID protests put a dent in those plans. With assembly lines at the Foxconn plant slowing to a crawl, Apple is struggling to keep up with iPhone demand. Try ordering an iPhone online now, and you’ll likely have to wait until January to get it. The problem with that is if consumers see excessive wait times on iPhone 14 Pro models, and are in need of a new phone, they may opt for the iPhone 14 or other less expensive iPhone, which would hurt Apple’s bottom line.
“The zero China Covid policy has been an absolute gut punch to Apple's supply chain, with the Foxconn protests in Zhengzhou a black eye for both Apple and Foxconn,” Wedbush analyst Dan Ives wrote in an investor note.
“The reality is that Apple is extremely limited in their options for holiday season and are at the mercy of China's zero Covid policy which remains a very frustrating situation for Apple as well as the Street,” Ives added.
China is the new bottleneck
Apple built its supply chain around China thanks to its relatively inexpensive, specialized workforce. The company has been building iPhones, Macs, and iPads in the country for years. But COVID-induced chip shortages and rolling lockdowns have forced Apple to start thinking beyond China.
In Aug., Nikkei Asia reported that Apple is in talks to build Apple Watches and MacBooks in Vietnam. In June, Nikkei reported that the company was looking to build iPads in Vietnam. In Sept. Apple announced that it was building its iPhone 14 in India.
COVID isn’t the only reason Apple is interested in moving its operations outside of China. Geopolitical tensions between the world’s largest smartphone market and the U.S. are putting pressure on Apple to search for other locations to build its products.
It’s not as easy as simply putting up a new factory and hiring workers, though. Apple is incredibly demanding of its manufacturing partners. The company requires each new device that comes off its assembly lines to meet its exacting production standards. And ensuring that a new factory can meet those expectations can take some time.
For now the iPhone maker will need to continue to rely on its existing partner facilities and hope that lockdowns ease at the Zhengzhou plant. Moving forward, however, it will likely increasingly look toward manufacturing partners outside of China with the hopes of avoiding future bottlenecks in its supply chain.
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