Apple (NASDAQ:AAPL) stock is set to close lower for the month of November as “brutal” supply chain issues continue to act as a major overhang on shares. Supply headwinds in China continued to escalate this week as violent protests at the key iPhone factory in Zhengzhou, operated by Apple’s major supplier Foxconn, added to supply issues and underscored the effects China’s zero-Covid policy has on global tech firms.
Troubles at the factory began in October when a group of workers left the plant amid a recent surge in coronavirus infections. While Foxconn offered bonuses to workers to return to the factory, newly hired staff said the company failed to keep its promise, which resulted in a violent clash between workers and security officers wearing hazmat suits.
It was reported earlier this week that Zhengzhou ended lockdowns. Much of the Chinese equities market responded positively to the news.
“This is some good news in a dark storm for Cupertino,” Daniel Ives, Wedbush analyst, said.
“There is a lot of heavy lifting ahead for Apple to ramp back up the factories.”
Diversifying Away from China
Given the recent headlines from China, it comes as a no surprise why Apple is working to diversify its supply chain away from China. Recent supply chain data, compiled by Reuters, showed that Apple’s exposure to Chinese manufacturing has been already decreasing since the coronavirus outbreak in 2020.
As a result of decreased production output and recent protests spurred by China’s stringent coronavirus restrictions, analysts expect Apple’s retreat from China to accelerate. China’s prominence in Apple’s global production has notably declined. During the five year period to 2019, China was the main location of 44-47% of the company’s production facilities, although that figure later declined to 41% in 2020, and 36% in 2021.
The survey also shows how the global supply structure has changed since Apple and its suppliers diversified away from China, focusing on new investments in India, Vietnam, the U.S., and Taiwan, among other locations. However, the tech giant’s exposure to China will remain at a high level at least for another couple of years.
Historically, China has been Apple’s key supply hub, where Foxconn has been producing 70% of global iPhone output. However, the landscape has been changing as China’s zero-Covid policy and growing geopolitical disputes between Beijing and Washington pose long-term risks that cannot be ignored anymore.
As such, Foxconn has been ramping up its production in India, planning to quadruple the workforce at its iPhone manufacturing facility over two years.
Wall Street banking giant JP Morgan expects Apple to shift around 5% of iPhone 14 production to India this year and make one in four iPhones there by 2025. The bank projected that 25% of all Apple devices will be produced outside China by 2025, compared to the current 5%.
Billions in Lost or Deferred iPhone Revenue
Speaking about this month’s events, Wedbush's Ives said the production halt at Apple’s key iPhone facility represents an “albatross” for the tech behemoth.
“Every week of this shutdown and unrest we estimate is costing Apple roughly $1 billion a week in lost iPhone sales. Now roughly 5% of iPhone 14 sales are likely off the table due to these brutal shutdowns in China,” Ives told CNN.
Ives noted that demand for the recently released iPhone 14 model was significantly higher than supply during the Black Friday holiday weekend, and could potentially lead to substantial iPhone shortages during Christmas. He said that issues at Foxconn’s plant have dealt a major blow to Apple this fiscal quarter.
He added that iPhone 14 pro shortages “have gotten much worse over the last week with very low inventories.” More specifically, Ives projects that Apple’s iPhone inventory is around 25-30% below normal levels as the company heads into a holiday season.
TF International Securities analyst Ming-Chi Kuo, one of the most closely watched analysts as far as Apple is concerned, projects that over 10% of global iPhone production output was affected by the ongoing issues at the Zhengzhou factory. His forecasts come after Reuters reported that Foxconn expects up to 30% of lost iPhone shipments from the Zhengzhou plant in November.
Summary
Apple stock price fell in November after the tech titan experienced major supply issues at the key iPhone factory in China. As a result, analysts are predicting billions in lost iPhone revenue for this quarter. While the stock is popularly known to have a number of long-term prospects making it attractive to investors, the firm is continuing to face serious challenges in the face of the world’s interconnected global supply chain.
Given that China ended lockdowns in the city that hosts the key iPhone production hub, Apple bulls will hope that Foxconn will be able to ramp up iPhone production and help the tech titan recover some of lost revenue and still manage to deliver a decent quarter in December.