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Apple suppliers scramble to keep vast factories virus-free

Foxconn and others given strict health guidelines for campuses housing tens of thousands of workers

TAIPEI -- Virus-proofing a campus the size of 250 football fields where 100,000 people live and work is no easy task, but that is what Foxconn had to do to get production back up to speed after the extended Lunar New Year's break. And its troubles may still not be over.

Normally the company only shuts its flagship Longhua campus in Shenzhen for a few days, if at all, during the holiday season, and once workers return from their hometowns, its production lines are quickly back up churning out Apple iPads, Huawei smartphones and Google smart speakers.

But with the death toll from the coronavirus growing, local authorities have ordered Foxconn and other major tech manufacturers to implement a wide range of health and safety measures at their campuses, from setting up quarantine spaces to installing infrared temperature scanners and stocking up on surgical masks and disinfectant.

Tech companies across China were already worried about how to make up for lost time after the New Year holiday was extended by 10 days. The threat of further delays highlights the risk of overly centralized production -- and could eventually spur manufacturers to accelerate their shift away from China.

For Foxconn in particular the challenges are huge. The world's biggest electronics contract manufacturer had intended to resume production at Longhua on Feb. 10, when the holiday officially ended, but authorities put the brakes on those plans, citing concerns about poor airflow in dorms, restaurants and production facilities. The company has since received the OK from officials, indicating it has satisfied the anti-virus guidelines, but staffing issues remain.

"It will take at least one to two months rather than just one to two days, for normal resumption of manufacturing," a source familiar with matter told the Nikkei Asian Review. "We have to extremely lower the risks. ... Foxconn's current priority is not to churn out as many products as quickly as possible but instead ensure the recovery of small-scale production proceeds smoothly and later gradually pick up."

"Furthermore, for most sites, we currently only have staff who live nearby, while many of our usual production line workers come from distant towns thousands of miles away and still can't come back," the source said, adding that the staffing issue could only be resolved once the coronavirus was proved to be under control.

Under the local government's guidelines, companies must set up infrared thermometers and have a two-week supply of surgical masks and disinfectant on hand before they can resume operations. They are also encouraged to reduce the number of meetings each day and have everyone sit at least 1 meter away from each other with windows open when they do meet.

Foxconn has gone further and developed a smartphone app that sends alerts to employees if they go too close to infection hotspots or gather in large groups on campus, one source told Nikkei. The company further plans to stagger meal times at nearly 20 company restaurants, other sources said, with one of them adding that employees are advised to eat alone, talk less and reduce meetings with friends after work.

Foxconn has even established its own surgical mask production line, with plans to churn out 2 million units a day by the end of February.

The company operates some 45 massive plants across more than 40 cities in China, but some have been hit harder than others -- including its Wuhan sites in Hubei Province, which makes HP and Dell notebooks, and its Zhengzhou site in Henan Province, the world's biggest iPhone production base. The latter could not immediately restart production on Feb. 10.

Shenzhen is not the only local government to issue guidelines for fighting the virus. In Shanghai, employees also have to wear masks and have their temperature checked when entering and leaving manufacturing complexes. Workers coming back from other provinces, moreover, must be quarantined in their dormitories for 14 days before rejoining the production lines, during which time their temperature is to be checked twice a day and all their meals delivered to their rooms. In other cities, workers must complete an epidemic prevention training session or even take an online test before going back to work, sources said.

"We are working closely with local health inspectors and officials who come to check almost every day," a source familiar with the matter said. "All the different local governments across China have slightly different requirements. ... They are really worried that they will become the one who is spreading the disease and shoulder this massive responsibility."

Major manufacturers like iPhone assemblers Pegatron and Wistron and MacBook maker Quanta Computer, which have plants across China, will have to meet slightly different guidelines for different locations.

While that is a major challenge in itself, the fact that most of these key makers of Apple, HP, Dell, Amazon and Google devices are not Chinese companies only adds to the pressure, sources say.

"We are definitely under the spotlight and cannot make any mistakes on our end. .... We are not like those Chinese state-sponsored companies, where there are unwritten rules that they can get support and have trouble covered up," one of the Taiwanese supply chain executives told Nikkei. Non-Chinese companies share a common fear of being singled out if they make any mistakes at this critical moment of the coronavirus threat, multiple industry insiders said.

The world's top notebook maker Quanta Computer and iPad maker Compal Electronics are Taiwan-based companies, as are the three key iPhone assemblers Foxconn, Pegatron, and Wistron.

On the other hand, key AirPod builders such as China's Luxshare ICT, traded as Luxshare Precision Industry, and Goertek, as well as iPad maker BYD -- all Chinese companies -- told Apple that they could resume some production as scheduled on Feb. 10 without a prior government audit, sources briefed on the matter told Nikkei.

There is also a disconnect between Beijing, which wants businesses up and running as soon as possible, and local governments and suppliers, who are worried that even one confirmed case at a factory could lead to a full-blown shutdown.

In a notice to all local governments on Feb. 8, the State Department urged authorities to do all they could to ensure manufacturing and other activities resumed as soon as possible to stabilize the economy. Three days later, an official from China's National Development and Reform Commission, the country's top economic planner, said local authorities are strictly prohibited from restricting companies from restarting production, except in Hubei Province. In ordinary conditions, there is "no need to shut down the whole business if there are confirmed cases found in those companies," the commission added, contradicting what most companies were told by their local governments days ago.

"The central government is eager to see economic activities resume as soon as possible for obvious reasons," Kevin Lai, chief economist at Daiwa Capital Markets in Hong Kong, told Nikkei in an emailed response to questions.

President Xi Jinping pledged to double the country's GDP in 2020 compared to 2010, which is also the Communist Party's key long term goal of achieving the so-called "comprehensive well-off society." Lai agrees that there is a political incentive for the central government to achieve a certain level of growth this year. in January, the IMF projected that the Chinese economy would grow by 6%, but economists have been lowering their forecasts in recent days. this week, Citi lowered its estimate for china's growth to 5.3% from 5.5%.

At the same time, "the outbreak is still expanding everywhere" and local governments are on the forefront of the epidemic "know very well that it is impossible to restart business now. Otherwise everyone will be Wuhan," he said.

Lai noted that in addition to the health crisis, there will be an economic one if business activity does not recover soon enough. "Jobs will be at risk. Many businesses will have to close. A lot of debts will not be paid." he said. "All these will increase social pressure."

While companies across the country gradually reopened their factories from Monday, labor shortage issues are expected to linger as hundreds of thousands of workers must overcome traffic restrictions and possible quarantines before they can rejoin the production work. Most companies were operating at far less than 50% of their normal capacity this week, with many worried about whether their own parts suppliers will be able to deliver necessary components on time.

"Let's say a worker who lives outside of the province reports for duty at the end of February. That means he could only start working at the earliest in the middle of March. ...It takes time to normalize the operation of factories," a supply chain source told Nikkei.

Most tech industry executives agree that business will be significantly impacted in the first quarter as manufacturers struggle to resume production.

Hu Genda, chairman and CEO of Shenzhen-based chip developer Focaltech, told Nikkei that for plants that suspended manufacturing during the new year break, "it's quite challenging for them to resume production."

"The pace for people coming back to work is slower than expected. ... It's not easy for people to travel," Hu said. "At our company, too, at the start, maybe only 20% of staff could come to work." Focaltech supplies to most of the key smartphone makers, including Huawei, Oppo and Xiaomi.

The virus outbreak also highlights the risk of overly centralizing production or revenue contribution from a single market, analysts said.

"Take Samsung for instance. It has largely diversified its production away from China years ago and now it nearly has no presence in the Chinese smartphone market, which means the South Korean has been hurt less than the other companies," Chiu Shih-fang, a veteran smartphone supply chain analyst at Taiwan Institute of Economic Research, told the Nikkei.

"On top of the ongoing Washington-Beijing trade war, companies need to keep diversifying from China to lower the corporate operational risk in the long term, otherwise it is extremely challenging for them to cope with unexpected and imminent risks like the coronavirus outbreak this time," the analyst added.

Nikkei Asian Review chief business correspondent Kenji Kawase contributed to this report.

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