Coronavirus Outbreak Poised to Hit Apple’s China Supply Chain

On an earnings call Tuesday, Apple management said that "uncertainty" regarding the public health crisis affected its March quarter guidance.
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The deadly coronavirus outbreak in Wuhan, China may have ripple effects for Apple.

As of Tuesday, Chinese authorities were undertaking drastic measures to contain the virus, which has infected thousands and killed more than 100 people. Those measures include a quarantine on Wuhan and travel restrictions in the surrounding area, potentially disrupting Apple’s manufacturing base in the region. Shares of Apple  (AAPL) - Get Report were up 1.5% in after hours trading after it topped earnings and revenue forecasts for the December quarter. 

According to a report from Nikkei Asian Review, Apple’s suppliers have warned that the outbreak could complicate Apple’s iPhone production, including production of a planned lower-cost iPhone due to be revealed this year. Apple had asked suppliers to produce 80 million iPhones total in the first half of this year -- 65 million iPhone 11 models and 15 million of the forthcoming budget model -- but suppliers including Foxconn have expressed concern that the virus could interfere the rapid pace of manufacturing, the report said. 

On a shareholder call Tuesday, Apple CFO Luca Maestri said that "uncertainty" around the outbreak affected its March quarter revenue guidance of between $63 billion and $67 billion, a wider-than-normal range. Supplier factories are opening on a delayed basis after the Lunar New Year due to the health crisis, Apple said. 

Maestri and CEO Tim Cook also detailed a range of impacts from the virus, including the closure of one Apple retail store in the area, the closure of several resellers, and lower overall retail traffic in recent days. Cook noted that Apple has some suppliers in the Wuhan area, but that there are alternatives for each of those suppliers. 

"I'm certain that Apple's supply chain will be impacted," said Patrick Moorhead, president at Moor Insights & Strategy. "The only question is how big that impact will be and how long it will be for. Entire cities are being sequestered and citizens are unable to even work in the heaviest hit cities." 

Apple’s main manufacturing bases are located in Zhengzhou and near Shanghai, both of which are several hundred miles away from the center of the outbreak -- but critical supply chain issues such as staffing and movement of raw materials around the region may be vulnerable to disruption.

“Supply chain disruption is a worry if employees across Foxconn and other component manufacturing hubs in China are restricted along with transportation issues which could limit or slow down supply,” Wedbush analyst Dan Ives told TheStreet. “Right now it’s contained, however if the China outbreak becomes more spread it could negatively impact the supply chain which would be a major investor worry.”

Apart from potential supply chain disruptions, Apple reported sales of $13.58 billion in China, representing growth of 3.1%. Apple's China results are watched closely in light of a developing U.S.-China trade deal and last year’s relative weakness in the large market.

News of possible disruption to Apple’s iPhone production also highlights its reliance on China as a manufacturing base, another area of close scrutiny amid tariff threats by the Trump administration throughout 2019.

Apple is reportedly endeavoring to shift some of its production to India and Southeast Asia, but doing so will be a lengthy and complicated process. Wedbush’s Ives estimated last year that it would take Apple at least two to three years to move 15% of its iPhone production to other countries, such as India and Vietnam.

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