Opinion: Apple coronavirus warnings highlight complexities of tech supply chains

Julio Franco

TechSpot Editor
Staff member

As the impact of the coronavirus spreads, Apple issued a rare statement yesterday related to the coronavirus’ impact on its quarterly earnings guidance and that announcement is now reverberating throughout the tech industry as well. The company reported that its current quarter’s earnings will likely be negatively affected by several factors related to the virus, specifically its effect on the Chinese market and its global supply chain.

What makes the news even more disconcerting is that the company had already suggested on its last earnings call just a few weeks back that revenues for the quarter could fall into a much wider range of potential outcomes than they typically provide because of the uncertainties the virus was creating. A second negative statement just a few weeks later highlights that the impact of the virus is proving to be much worse than originally thought. The fact that they didn’t say how much the earnings guidance decline would be also emphasizes the uncertainty about the total extent of the virus’ impact.

Specifically, Apple said that sales of iPhones in China—an increasingly important market for the company—will be lower than it had predicted because many of its retail stores and other retail partners’ stores have been closed as a result of the virus. In addition, as stores reopen, the traffic in them has been significantly lighter than normal, leading to the slowdown in sales. Theoretically, online sales shouldn’t be impacted as strongly, but it’s not hard to imagine that the delivery mechanisms in China have also been slowed by the virus.

Ultimately, however, it’s essential to remember that this issue is an extremely challenging humanitarian crisis and that companies need to be (and, likely will be) sensitive to the issue and do whatever they can to keep their workers safe.

The second factor Apple cited—a slower ramp to full production after Chinese New Year—is potentially more troublesome, because it impacts the company’s entire global supply of iPhones and other devices. In addition, it certainly implies that other major tech hardware vendors could start feeling this soon as well.

As most people know, the vast majority of Apple’s devices are built in Chinese factories, so the company—like most every other hardware tech vendor—is currently very reliant on these Chinese factories cranking out products in huge quantities on a steady basis. And that’s really the problem, because if Apple is starting to notice the impact strongly enough that it felt the need to issue a statement on revised guidance, then we’re likely going to see a lot of other hardware-focused tech vendors do something similar over the next few days or weeks. In fact, even before Apple, Nintendo had disclosed that it won’t be able to build as many of its Switch gaming consoles as it would like, because its primary production partner Foxconn—who also happens to be Apple’s largest factory partner—was facing delays at its Chinese factories.

The other thing to bear in mind is that even companies that don’t have factories in the most affected areas of China can see their production slowed because of their dependence on certain parts or other components that do come from the most impacted regions. These days, the number of subcomponents that go into more sophisticated tech devices can easily reach over 100, and because so many of these subcomponents are built in China, the range of impact from the virus is potentially much wider than it first appears.

By the way, the timing here is also very important. One thing that many people don’t understand is that, as terrible as it is, the coronavirus started seriously impacting Chinese factories just before the one week in the year when they’re scheduled to be offline: Chinese New Year. If the virus had hit at another time of year, the impact could have been much worse. Now companies are trying to determine how many workers are returning to the factories after their scheduled break, and it’s those metrics that are going to be the most closely watched over the next few weeks.

In addition, out of an abundance of caution, I’ve also heard some hardware vendors say that the Chinese government is imposing mandatory factory shutdowns of 30 days if a single worker is discovered to be infected. Needless to say, that’s going to force companies to be very conservative about letting employees come back to work, which could also result in serious delays in production.

Ultimately, however, it’s essential to remember that this issue is an extremely challenging humanitarian crisis and that companies need to be (and, likely will be) sensitive to the issue and do whatever they can to keep their workers safe. Taking the big picture view, these production delays will likely (and hopefully) be little more than a blip on the long-term radar of tech industry production. Unfortunately, because many institutional investors are more concerned with short-term financial performance, this may cause some short-term challenges for those companies who are being impacted. Long-term, let’s hope the tech industry can learn from this crisis and figure out ways to both protect the workers who help bring products to life and to create supply chains that can withstand the inevitable challenges that lie ahead.

Bob O’Donnell is the founder and chief analyst of TECHnalysis Research, LLC a technology consulting and market research firm. You can follow him on Twitter . This article was originally published on Tech.pinions.

Masthead credit: Shutterstock

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psycros

TS Evangelist
It has nothing to do with "complexity" and everything with the SPOF nature of current supply chains. At least this outbreak will finally push companies to stop the current China-only approach.
If only. I think we both know that won't happen unless the cost of manufacturing in China goes from "very low" to "just low". THEN they'll be scrambling to build fabs in other developing and/or third world countries.
 

S Hone

TS Rookie
If only. I think we both know that won't happen unless the cost of manufacturing in China goes from "very low" to "just low". THEN they'll be scrambling to build fabs in other developing and/or third world countries.
China has been moving their production to Africa in order to move to a high tech and services economy.

China has been milking the west for decades and the west has been compliant, well the corporations have. With Chinas human rights record, this is criminal until the CCP falls and a decent government rises. I would be delighted to see the rise of China in principle, but would prefer to take the pain of a collapsing China if the CCP are the ones at the helm
 

Markoni35

TS Maniac
China has been moving their production to Africa in order to move to a high tech and services economy.
That's a myth. African countries are not a good option for outsourcing. Running business in them is very risky, there's too much corruption, too much street crime, too much economic crime, labor is less reliable, less educated, they don't produce consistent products and you always have to check if they are "carrying work to their home" to put it polite.

China would rather outsource some of the jobs to North Korea, because people there are reliable, used to hard work, produce consistent results, take their job very seriously, and have low salaries. Which makes North Korea an ideal country for manufacturing, except of course for one little thing: Western countries wouldn't accept products manufactured in N.K. because of political reasons.

So China will probably outsource parts of their production to Cambodia and other East-Asian countries. I doubt Africa will become interesting to them anytime soon, except as a source of ore.
 

p51d007

TS Evangelist
Corporations, under increasing pressure from stockholders, greedy investors, CEO's will always seek out the CHEAPEST labor markets. I still think the so called virus that started at a live market with a bat, was a bunch of horse dung. I think it was released on purpose, for two reasons. One, to take out the elderly, who are a "drain" on the communist government, and most important, to SHUT DOWN the freedom protesters nationwide. Now, they can lock them up in a so called hospital for "the good of the people" because they MIGHT be infected.
 

Reallyhow

TS Enthusiast
China has been moving their production to Africa in order to move to a high tech and services economy.

China has been milking the west for decades and the west has been compliant, well the corporations have. With Chinas human rights record, this is criminal until the CCP falls and a decent government rises. I would be delighted to see the rise of China in principle, but would prefer to take the pain of a collapsing China if the CCP are the ones at the helm
It says a lot about you that you want to watch a billion people suffering due to the actions of their leaders.

Seeing people upset over these production delays has been amusing. "Oh no! The child slaves can't work as many 18 hour days! I might have to wait slightly before I shovel money into a trillion dollar corporation!"
 
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Underdog

TS Addict
China has been moving their production to Africa in order to move to a high tech and services economy.

China has been milking the west for decades and the west has been compliant, well the corporations have. With Chinas human rights record, this is criminal until the CCP falls and a decent government rises. I would be delighted to see the rise of China in principle, but would prefer to take the pain of a collapsing China if the CCP are the ones at the helm
"China has been milking the west for decades....................etc."

Who has been milking who? Every time a Western CEO decides to send production to China they are seeking to increase their profits, pure and simple. The tragic side effect is that the domestic workforce lose their jobs. Where does this logically end? It doesn't. Not unless continuous growth and greed are curtailed.