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Apple will be unable to ship large volumes of its higher-end flagship product during the holidays after the largest factory producing it shut down amid the latest wave of COVID-19 lockdowns in China.
An industrial park in China’s Henan province that is home to a critical assembly plant for Apple iPhones closed last week for seven days after several COVID-19 cases were reported. The plant is owned and managed by Foxconn, Apple’s biggest iPhone supplier, which announced a “small” COVID outbreak at the plant.
The Foxconn factory produces as many as half of the world’s iPhones, and employs up to 350,000 people, many of whom live nearby, leading to it being dubbed “iPhone City.”
But the recent closure could lead to a supply disruption of up to six million iPhones, mainly the higher-priced Pro and 14 Pro Max models of the new iPhone 14, Bank of America analysts, led by senior equity research analyst Wamsi Mohan, wrote in a note on Sunday.
The supply shortfall for the pro versions of the latest iPhone is a blow to Apple, which was reportedly already dealing with lower-than-expected demand for the non-pro versions of these products since their launch in early September.
Apple and Foxconn had previously emphasized that demand for the pro versions of the iPhone 14 was strong, but the Bank of America analysts wrote that they were now “concerned” about falling demand.
Production delays
Even if it just lasts a week and lifts on Wednesday as expected, the Foxconn closure will carry some long-term consequences for Apple.
Mohan’s team wrote that lead times—the time it takes for a product to be shipped and delivered—had already been extended by at least a week as a result of the shutdown, and the bank revised its quarterly output forecast for the plant to 78 million units, down from 84 million before the closure. The six million lost units were spread mostly evenly between the iPhone 14 Pro and the 14 Pro Max models.
The Foxconn factory’s utilization rate—how much of the plant’s resources and equipment are being used as a percentage of its total possible output—currently stands at just 50%, according to the analysts, far below the 85% to 90% utilization rate range generally considered to be ideal.
Mohan’s team predicted that the plant’s utilization rate could tick up to 70% during the last two weeks of November, and largely return to normal by December, barring any extensions of the current closure. But even if production at the factory resumes, demand for Apple’s products is likely to remain relatively subdued until the second quarter of next year.
Low supply, low demand
With lower supply of the higher-priced pro models, the analysts warned of a “worse iPhone mix than we had prior expected,” after demand for the pro versions of the new phone took off in the months after its release.
Apple has been relying on the strong performance of the iPhone 14 Pro and Pro Max to offset falling demand for the two lower-end models of the phone: the iPhone 14 and the 14 Plus.
At the end of September, Apple reportedly scrapped plans to ramp up production of new iPhones as demand stalled for its two entry-level models. And on Sunday, the company was said to be trimming output by three million units by the end of the year amid lower-than-expected consumer demand, Bloomberg reported.
Strong sales of its new pro iPhone models were a factor behind Apple’s strong earnings report last week that showed it outperforming many other tech companies. Both Facebook parent Meta and Amazon saw losses stemming from lower consumer demand and a decline in ad revenues.
But with constrained supply of its new pro models given the Foxconn closure, Apple’s revenues could dry up quickly. In a statement Sunday confirming the plant’s shutdown, Apple warned it would lead to smaller shipments of the pro models and “longer wait times” for customers. Component manufacturers and Apple suppliers sent a warning sign when they posted a decline in sales last quarter, forecasting a looming drop in demand for Apple products including smartphones and tablets.
China’s ongoing COVID-zero policy and the closure is an “absolute gut punch” for Apple, according to a tweet Monday by Dan Ives, managing director and senior analyst at Wedbush.
IPhone sales this quarter could fall as much as 3% worldwide due to the shutdown, Ives added.
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