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Apple eyes 10% production boost but suppliers fear coronavirus

Planned increase in iPhones faces 'massive uncertainties'

Rising orders for Apple iPhones helped double the company's share price over the past year, though its Asian suppliers now warn that China's coronavirus has created "massive uncertainties" about iPhone production. (Nikkei montage/source photo by Reuters and Getty Images)

TAIPEI -- Apple has asked suppliers to make up to 80 million iPhones over the first half of this year, people familiar with its planning told the Nikkei Asian Review, an increase of over 10% from last year's production schedule that could boost the company's near-record share price.

Apple, which reports fourth-quarter results after Tuesday's U.S. market close, has booked orders for up to 65 million of its older iPhones, mostly from the iPhone 11 series, and up to 15 million units of a new cut-price model that it plans to unveil in March. Apple ordered 73 million iPhones over the same period last year, according to GF Securities data.

"This year is much busier than last year," an industry source said.

However, suppliers warned that the blistering pace of production could be complicated by the outbreak of the coronavirus in China's Hubei Province, given that their main manufacturing centers are in nearby Henan and Guangdong provinces, which had more than 100 confirmed cases as of Monday afternoon, and in Shanghai, with over 50 confirmed cases.

"The [coronavirus] situation in China could affect the planned production schedule," one supply chain executive, whose trip to China has been postponed due to the virus, told Nikkei.

Chinese authorities, who have locked down Hubei Province, said early on Tuesday that the SARS-like virus had so far claimed 106 lives on the mainland, with over 4,500 confirmed cases. But a team of British and U.S. scientists has provisionally forecast that the virus could infect over 190,000 people by Feb. 4.

By contrast, seasonal flu -- another form of coronavirus -- results in 140,000 to 810,000 hospitalizations every year, and 12,000 to 61,000 deaths worldwide, the U.S. Centers for Disease Control and Prevention estimates.

Apple's aggressive push to boost iPhone production comes as the Cupertino, California-based company, the world's most valuable by market capitalization, has adopted a new budget-conscious pricing strategy to boost sales in emerging markets.

The strategy switch came after iPhone sales, which account for half of Apple's revenue, suffered two consecutive quarters of decline in the first half of 2019, with Apple CEO Tim Cook acknowledging "price is a factor."

Apple's latest iPhone 11 series, for example, was introduced last September at a starting price of $649, compared with the standard iPhone entry price of $700, despite improvements such as a better camera.

The new cut-price iPhone that Apple plans to unveil in March represents a continuation of the new cost-conscious approach. Mass production is due to start in the third week of February, although that schedule may change due to the virus outbreak, two sources familiar with the situation told Nikkei.

Apple shares, which have more than doubled in price over the past 12 months, touched a record high of $323.32 on Jan. 24, but have since fallen back due to virus-related fears. The stock closed down 2.9% on Monday at $308.95.

"With the upcoming cost-effective new iPhone this spring, and the better-than-expected demand for iPhone 11, it looks like Apple will have a better first half of this year compared with the same time a year ago," Chiu Shih-fang, a smartphone and supply chain analyst at the Taiwan Institute of Economic Research, told Nikkei.

The U.S. ban last May on the use by China's Huawei Technologies of Google apps on its smartphones, then the world's second most popular, has also helped iPhone sales.

Suppliers added that Apple is also boosting production of its AirPods range of wireless earbuds, by up to 45 million units for the first half of this year. In contrast, Apple sold 60 million AirPods in all of 2019, according to Strategy Analytics. Apple has over 50% of the global market in the booming wireless Bluetooth earphone segment.

"Both suppliers and their client [Apple] are more aggressive this year than last year," another iPhone supply chain executive told Nikkei.

However, executives stressed that the coronavirus has created "massive uncertainties and challenges" for production of both iPhones and AirPods. As with its iPhones, most of Apple's AirPods production is in China.

Terry Gou, founder of Foxconn, which trades as Hon Hai Precision Industry and is the world's biggest maker of iPhones, said last week that he was extremely concerned about the virus, and warned that its rapid spread, abetted by mass travel during the Lunar New Year holiday, could disrupt supply chains.

"We are considering whether or not to let employees return to China after the Lunar New Year holidays," Gou told reporters last week in Taipei, a day before Wuhan was locked down and quarantined by Chinese authorities. Local staffing may be an additional problem, company sources have since told Nikkei.

Analysts warned that the virus could also hit China's faltering economic growth rate, which in turn could hurt local sales of consumer goods such as smartphones.

"China's economy is already in a slowdown due to the U.S. trade conflict," said Chiu of the Taiwan Institute of Economic Research. "If the Wuhan situation is not controlled, it could have a further impact."

Apple declined to comment.

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