Apple warns of lower iPhone shipments as COVID curbs hobble China plant

  • Apple expects lower shipments of iPhone 14 Pro and Pro Max
  • Apple says factory in China is operating at greatly reduced capacity
  • Apple supplier Foxconn revises down its outlook for the fourth quarter

TAIPEI, November 7 (Reuters) – Apple Inc. (AAPL.O) expects shipments of high-end iPhone 14 models to be lower than previously expected following a major production cut at a virus-hit factory in China, clouding its sales outlook for the busy holiday season.

Demand for high-end smartphones assembled at Foxconn (2317.TW) The Zhengzhou factory has helped Apple remain a bright spot in a tech sector battered by shrinking consumer spending amid soaring inflation and interest rates.

But the Cupertino, Calif.-based supplier has fallen victim to China’s zero COVID-19 policy, which has seen global companies such as Canada Goose Holdings Inc. (GOOS.TO)and Estee Lauder Companies Inc. (EL.N) close local stores and reduce forecasts.

“The facility is currently operating at a significantly reduced capacity,” Apple said Sunday without detailing the extent of the reduction.

“We continue to see strong demand for the iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect iPhone 14 Pro and iPhone 14 Pro Max shipments to be lower than what we expect. previously planned,” he said in a statement.

Reuters reported last month that iPhone production could drop by up to 30% in November at Foxconn’s Zhengzhou factory – one of the world’s largest – due to COVID-19 restrictions.

The central China factory, which employs around 200,000 people, has been rocked by dissatisfaction with strict measures to curb the spread of COVID-19, with many workers fleeing the site.

Market researcher TrendForce last week cut its iPhone shipment forecast for October-December from 2 million to 3 million units from 80 million due to factory issues, adding that its survey had revealed capacity utilization rates of around 70%.

Apple, which began selling its iPhone 14 line in September, said customers should expect longer wait times.

“Anything that affects Apple’s production obviously affects its stock price,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina.

“But this is part of a much deeper story – the uncertainty surrounding the future of China’s economy…These headlines are part of the ongoing saga of whether there is any truth to the constant rumors that the authorities are discussing whether some of the measures will be lifted in the first quarter.”

China reported its highest number of new COVID-19 infections in six months on Monday, as the disruption in the world’s second-largest economy spread nationwide since October. This weekend, health officials said they would stick to tough coronavirus restrictions, disappointing investors hoping for an easing.

Meanwhile, Apple plans to produce at least 3 million fewer iPhone 14 handsets this year than expected due to weak demand for lower-end models, Bloomberg News reported Monday, citing people familiar with the plan.

The world’s most valuable company, with a market capitalization of $2.2 trillion, forecast last month that revenue growth from October to December would slow from 8% in the previous quarter – although the market watchers have viewed this favorably in a struggling industry.

“Given that Apple only released a positive guidance two weeks ago, we believe this signals the potential for a longer and more severe lockdown,” Credit Suisse analysts said, expecting that iPhone sales are pushed back to later than lost quarters.

They estimated Apple’s revenue would rise 3% in the current quarter, with iPhone sales rising 2% to $73 billion.

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FOXCONN CUTS ITS OUTLOOK

Taiwan’s Foxconn is the world’s largest contract electronics maker and Apple’s largest iPhone maker, accounting for 70% of global shipments. It has iPhone production sites in India and southern China, but the largest is in the city of Zhengzhou in eastern Henan province.

Local authorities recently commented on cases of COVID-19 at the plant. Foxconn declined to disclose the number of infections or comment on the conditions of those infected.

On Monday, he said he was working to resume full production in Zhengzhou as soon as possible. A person familiar with the matter told Reuters Foxconn’s target was by the second half of November.

At the request of the local government, Foxconn said it would implement measures to curb the spread of COVID-19, including restricting movement of employees between their dormitory and the factory area.

The manufacturer has also launched a recruitment campaign, offering workers who left the factory from October 10 to November 5 a one-time bonus of 500 yuan ($69) if they returned. It also announced wages of 30 yuan an hour, higher than the 17 to 23 yuan base wages some workers told Reuters they received.

The Zhengzhou Airport Economic Zone, home to the iPhone factory, entered a seven-day lockdown on Wednesday with measures including banning residents from going out and allowing access only to approved vehicles. Read more

Foxconn said the provincial government “has made it clear that it will, as always, fully support Foxconn.”

“Foxconn is now working with the government in a concerted effort to eradicate the pandemic and resume production at full capacity as soon as possible.”

After previously expressing “cautious optimism” in its fourth-quarter earnings forecast, Foxconn said on Monday it would “downgrade” its outlook in light of events in Zhengzhou.

The fourth quarter is traditionally a hot season for Taiwanese tech companies as they rush to supply smartphones, tablets and other electronics for the holiday shopping season in Western markets. Foxconn releases its third quarter results on November 10.

The company, formerly Hon Hai Precision Industry Co Ltd, saw its share price fall 0.5% on Monday, against a 1.5% rise in the benchmark. (.TWII).

($1 = 7.2135 Chinese yuan renminbi)

Reporting by Ben Blanchard and Sarah Wu in Taipei, Caroline Valetkevitch in New York and Jaiveer Shekhawat in Bengaluru; Additional reporting by Brenda Goh; Written by Miyoung Kim; Editing by Daniel Wallis and Christopher Cushing

Our standards: The Thomson Reuters Trust Principles.

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