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Coronavirus

Apple's iPhone supply woes to continue into April: sources

Mass production of cheaper iPhones likely behind schedule

An Apple store in Hong Kong: The U.S. company previously asked suppliers to prepare 80 million iPhones, including up to 15 million units of a cheaper model, for the first half of 2020.   © AP

TAIPEI -- Apple will likely miss its schedule for mass producing a more affordable iPhone, while inventories of existing models could remain low until April or longer, despite suppliers in China gradually resuming production amid the coronavirus outbreak, sources familiar with the matter told the Nikkei Asian Review.

Apple had previously planned to release a more affordable iPhone this spring to maintain sales momentum into the first half of the year. Mass production was supposed to start by the end of February, but multiple sources say meeting that target is now very challenging and production could be delayed until sometime in March.

The U.S. tech giant had previously asked suppliers to ready up to 80 million units of iPhones, including up to 15 million units of the cheaper model, for the first half of 2020, the Nikkei Asian Review reported. With that aggressive production plan now uncertain, Apple became the latest major tech company to lower its revenue forecast on Monday.

"The suppliers are doing their best to produce and ship the [cheaper] iPhone within four weeks. ...The delay can't be too long, otherwise it will affect the sales strategy of Apple's new products in the second half of this year," one of the people, who has direct knowledge of the matter, told Nikkei.

"On average, suppliers in the iPhone supply chain are currently operating at around 30% to 50% of capacity," another source told Nikkei. "The constrained supply of iPhones will likely extend to April. There are still a lot of hurdles, from labor shortages to logistics transportation."

"The biggest uncertainty is still lingering as no one can be sure whether the coronavirus is under control," the person said. The source added, however, that most suppliers expect to have more employees back at work as soon as next Monday, after the 14-day quarantine period expires for those who returned from other provinces by Feb. 10.

Apple did not respond to Nikkei's request for comment.

The world's biggest iPhone production site, in Zhengzhou, Henan Province, has restarted some iPhone assembly from last week, sources briefed on the matter said. In Shanghai, another key iPhone manufacturing base, a low level of production was maintained throughout the Lunar New Year break and is slowly picking up now that most cities in China ended the extended holiday on Feb. 10, the Nikkei Asian Review reported.

However, the ongoing epidemic means suppliers' biggest concerns are ensuring their plants remain virus-free, and quickly resolving shortages of labor, components and parts due to tighter travel restrictions, the people said.

Logistics in particular are a major headache. In some cases, suppliers must change truck drivers when crossing provincial borders due to quarantine requirements on anyone entering from another province. In other cases, they have to send staff to highway interchanges to register for deliveries in person, while drivers bringing supplies into a province must present authorization papers at border checkpoints, industry people said.

Beijing has asked local governments to facilitate the restart of production and work to stabilize the economy and growth. Premier Li Keqiang said last week that the key focus is to gradually resume production and work in a safe way, but he also stressed that local authorities are strictly prohibited from blocking transportation or closing roads to prevent people from returning to work. Beijing is moving to quickly revive the slowing economy, which research agencies such as Citi predict will grow at just 5.3% this year, the slowest in decades.

Apple, meanwhile, has lowered its revenue forecast for January-March due to the coronavirus outbreak, which has killed more than 1,870 people and infected more than 73,000 globally. It is the second time in just over a year that the Cupertino, California-based tech company has trimmed its revenue estimate.

Although Apple had already factored the outbreak into its previous estimate, announced on Jan. 28, the impact on the supply of iPhones has proved greater than expected. The company originally forecast revenue to rise 9% to 15% on the quarter in January-March thanks to strong sales of its latest iPhones, but provided an unusually large range for its forecast due to the virus.

Apple is taking a hit from the virus given that China is its biggest production hub. Among Apple's top 200 suppliers, about 75% of them had at least one production site in China, and 22% have three or more in the country, according to Nikkei's analysis.

"Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors," Apple announced on Monday, adding that the worldwide supply of iPhones will be temporarily constrained.

For the U.S. market, which contributed more than 50% of Apple's revenue, the waiting time for three popular models in the iPhone 11 range -- such as the midnight green 256 GB version -- is up to eight days. In the U.K., customers will have to wait up to eight days for a 256 GB black iPhone 11. Customers in Japan, which accounted for 15% of Apple's revenue, will have to wait four to nine days for delivery of the same models, while in Taiwan, the wait is up to 11 days, according to Apple's online shopping site as of Tuesday.

The impact of the virus on Apple's supply chain could be significant in the near term, given uncertainties in the labor force's return to work and the lean iPhone inventory, JP Morgan Asia Pacific Equity Research said on Tuesday in a note. "However, inventory restocking driven by the demand side could be strong once the virus impact lessens," it said.

Additional reporting by Takeshi Shiraishi in Palo Alto, U.S.

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