iPhone supply chain takes a hit from China’s Covid-19-zero enforcers

iPhone supply chain takes a hit from China’s Covid-19-zero enforcers

BEIJINGWith little warning, China closed the world’s largest iPhone factory on Wednesday, declaring the area around the Zhengzhou Foxconn Technology Group complex off limits to combat a local outbreak of Covid-19. It’s the last thing Apple needed.

The abrupt move is expected to further unsettle a factory already dealing with an on-site coronavirus outbreak protest, worker exodus and forced quarantine. Local authorities said on Wednesday they would sterilize the Foxconn campus and surrounding areas in the next three days and send N95 masks to workers, another sign of the government’s tighter control.

It served as a stark reminder of the Dangers for Apple of depending on a large production machine focused on China at a time of unpredictable lockdowns and uncertain trade relations. Shares of the company fell 3.7 percent on Wednesday, dragged down in part by the latest comments from US Federal Reserve Chairman Jerome Powell.

“The Zhengzhou plant plays a monumental role in ramping up capacity ahead of the Christmas season,” said Ms. Nicole Peng, an analyst at Canalys. “It is possible that some of the orders generated in the Christmas promotional campaigns cannot be delivered immediately. The delivery of products in certain channels could also be delayed.

For now, the Foxconn plant continue to operate within a “closed loop”, or a self-contained bubble that limits contact with the outside world, the company said in a statement Wednesday. This will keep some production going, but Foxconn did not address questions about how it will ship products in and out of the complex during the area lockdown.

President Xi Jinping’s Covid-19-zero policy, which relies on swift lockdowns to eradicate the disease wherever it appears, has shown little regard for the economy and has thrown swaths of the global supply chain into disarray. It has cut production for big names from Tesla to Toyota Motor, often with little warning. But Apple is by far the largest company to adopt China as a production plant.

Zhengzhou is Apple’s most critical production site, producing four out of five of its latest-generation phones and the vast majority of iPhone 14 Pro units, according to Counterpoint senior analyst Ivan Lam. Apple relies on its smartphone for about half of its revenue, and the lockdown comes in the midst of its peak production season in preparation for holiday shopping.

Apple’s iPhone production ramps up to tens of millions of phones a month at its peak, hundreds of thousands a day, each requiring a myriad of components, from chips and displays to cases.

A major reason Apple suppliers haven’t yet moved more of their iPhone production out of China is the accompanying component supply chain, which largely makes parts in China, according to Lam. Even India, which is the only other country with a plant qualified to produce iPhone 14 Pro units, mostly ships its components from China and only does final assembly and packaging.

Apple did not respond to a request for comment.

Chinese officials have allowed so-called green lanes for major companies during previous shutdowns, but the sheer scale of Apple’s logistics needs could give pause. Foxconn also urgently needs workers to replace those who have left, and it’s difficult to conduct a recruitment drive when crowds are banned.

While Foxconn should have enough materials in stock to keep production running for weeks, questions remain about whether it will be able to ship finished products. The language of Zhengzhou’s lockdown notice is unequivocal in prohibiting all activities and vehicle movements other than for essential purposes, such as the distribution of medical supplies. Foxconn’s inventory will eventually need to be replenished, in any case.

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