Apple’s Outlook Clouded as Coronavirus Extends Production Delays
(Bloomberg) -- Apple Inc.’s supply chain is feeling the strain as the coronavirus extends production outages and damps demand for the company’s products in China.
Manufacturing partners have imposed quarantines on workers returning from China’s Lunar New Year holiday, prolonging the idling of Apple device assembly operations for as long as a month. While some analysts say it’s too early to fully assess the toll on the Cupertino, California-based company, pessimism is creeping into their outlooks.
In late January, Apple gave a revenue forecast for the current quarter that was wider than usual, to account for the virus. But that was before the Chinese government postponed the resumption of normal economic activity by one week to Feb. 10, and Apple’s move to close all its retail stores in the country until further notice.
Hon Hai Precision Industry Co., the largest iPhone maker, officially resumes production Feb. 10, but it is sequestering returning workers for an extra seven to 14 days. On Friday, the company, also known as Foxconn, told employees at its Shenzhen facility not to return to work when the extended Lunar New Year break ends Feb. 10.
“Apple’s supply chain typically has about a week or two of buffer inventory during the Lunar New Year holiday and as such any major extensions of the quarantine beyond Feb. 10 increase the risks of impacting the supply chain,” Krish Sankar and other analysts at Cowen Inc. wrote in a note to investors on Friday. “This could effectively limit or push out near-term demand even in other geographies.”
The company generates $651 million to $802 million a week in China from iPhones, services and other hardware, the analysts estimated. Those businesses generate weekly earnings of roughly 5 cents a share, they added in the note. An Apple spokeswoman didn’t respond to a request for comment on Friday.
Apple’s popular AirPods Pro earbuds, and a new cheaper iPhone due to be launched at the end of March, may be most affected by production delays. Apple suppliers planned to start assembling the new handset in February.
The supply of AirPods Pro models are constrained in many parts of the world, according to iStockNow, which tracks retail inventory of consumer gadgets. The earbuds have been in high demand and low supply since they launched in October, and Apple plans to open new manufacturing facilities this year to increase supply.
Inventec, one of the few makers of AirPods, planned to start new facility as early as June, but the coronavirus has slowed that effort, according to a person familiar with the matter.
“The Coronavirus outbreak in China remains a risk to the Wearables business and the company as a whole,” Kyle McNealy and George Notter, analysts at Jefferies, wrote in a recent research note about Apple.
Some customized MacBook Pro laptops are available for delivery by March 10 at the earliest, longer than the typical one week. By contrast, the latest iPhones and many Apple Watch models are showing immediate availability for either in-store pickup or shipment globally, iStocknow data show.
Apple stores aim to have four to six of inventory, so that also provides a buffer -- unless production delays extend beyond a month.
“There clearly will be manufacturing disruption, but again it is too early to make any predictions until we get an idea of what factories are like post-Feb. 10,” Brad Gastwirth, an analyst at Wedbush Securities, wrote in a note to investors on Friday. “Executives we speak with are uncertain as to what portion of their workforce will return on Feb. 10 due to either travel restrictions, or fear of contagion.”
The largest impact in the near-term will be on Chinese demand, he added. “Will consumer demand be pushed forward, or erased entirely?”
Limits of people’s movements in some parts of China, and Apple store closures, will reduce demand for Apple’s products in the country, the Cowen analysts wrote on Friday. However, they see only “partial demand destruction,” meaning many shoppers will likely just wait to buy iPhones and other gadgets later.
Apple’s services business, especially its App Store, may benefit as Chinese consumers stay inside and seek out mobile games and other apps for entertainment, the analysts also said.
“A 1-month impact to demand is manageable with the full year EPS implications likely more modest given our expectation for only partial demand destruction and higher App Store revenues could be an offset,” they wrote.
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