China’s COVID-zero enforcers could hit iPhone Christmas supply

With little warning, China locked down the world’s largest iPhone factory on Wednesday, declaring the zone around the Zhengzhou Foxconn Technology Group complex off-limits to combat a local COVID-19 outbreak. It’s the last thing Apple needed.

The abrupt move is expected to further disrupt a factory already grappling with an outcry over an on-site coronavirus outbreak, worker exodus and enforced quarantine. Local authorities said on Wednesday that they will sterilise Foxconn’s campus and the surrounding areas in the next three days and send N95 face masks to workers, another sign of the government’s tightening grip.

It served up a stark reminder to Apple of the dangers of relying on a vast production machine centred on China to put together its most vital product.

China has locked down Apple’s largest iPhone production site.Credit:AP

“The Zhengzhou plant plays a monumental role in increasing capacity ahead of the holiday season,” said Nicole Peng, an analyst with Canalys. “Some of the orders generated in holiday promotional campaigns may not be able to be immediately delivered. Product delivery in certain channels could also be delayed.”

For now, Foxconn’s plant will keep operating within a “closed loop,” or a self-contained bubble that limits contact with the outside world, the company said in a statement on Wednesday. That will keep some production going. But Foxconn didn’t address questions about how it will ship goods in and out of the compound during the area’s lockdown.

Xi Jinping’s COVID-zero policy, which relies on swift lockdowns to stamp out the disease wherever it pops up, has shown little regard for the economy and thrown swaths of the global supply chain in disarray. It’s curtailed output for big names, from Tesla to Toyota, often with little advance warning. But Apple is by far the largest business to adopt China as its factory floor.

Apple’s most critical production site

Zhengzhou is the site of Apple’s most critical production, churning out four in five of its latest-generation handsets and the vast majority of iPhone 14 Pro units, according to Counterpoint senior analyst Ivan Lam. The California-based company relies on its smartphone for roughly half its revenue, and the lockdown comes in the middle of its peak production season in the buildup to Christmas season shopping.

Apple’s iPhone production ramps up to tens of millions of handsets per month at its peak — hundreds of thousands a day — every one of which needs a plethora of components, from chips and displays to casings.

A big reason why Apple’s suppliers haven’t yet shifted more of its iPhone production out of China is the accompanying component supply chain, which largely makes parts in China, according to Counterpoint’s Lam. Even India, which is the only other country with a plant qualified to produce iPhone 14 Pro units, largely gets its components shipped in from China and just does final assembly and packaging.

Apple didn’t immediately respond to a request for comment.

Foxconn makes the majority of the world’s iPhones at its Zhengzhou factory.Credit:Bloomberg

Chinese officials have allowed so-called green lanes for important enterprises during past lockdowns, but the sheer scale of Apple’s logistical needs might give some pause. The company also urgently needs workers to replace those who’ve left, and it’s hard to hold a recruitment drive when crowds are forbidden.

While Foxconn should have enough materials stockpiled to keep production humming for weeks, questions remain about whether it will be able to ship any finished products out. The language of Zhengzhou’s lockdown notice is unequivocal in forbidding all activities and vehicle movements other than those for essential purposes like distribution of medical supplies. Foxconn’s inventory will eventually need replenishing, in any case.

As China’s largest private-sector employer and a key tax contributor in Zhengzhou, Foxconn will likely win concessions from local officials — but those will need to be significant. China’s top chipmaker, Semiconductor Manufacturing International, worked with local authorities to transport much-needed materials into its Shanghai plant when the financial hub was in total lockdown early this year.

Much now depends on the length of the lockdown, which is intended to last for a week until November 9, but officials elsewhere in China have extended such actions for weeks, sometimes months, at a time.

The government notice emerged after Zhengzhou reported COVID-19 cases jumped to 359 for Tuesday, up more than threefold from a day before. Officials there have in recent days progressively imposed a web of smaller lockdowns and restrictions on areas as small as an apartment block.

Foxconn has sought to mitigate the potential disruption by raising wages and arranging for backup from its other Chinese plants should assembly lines stall in Zhengzhou. It can handle 100 per cent of production of iPhone 14 and older models via other sites within China, but only has a handful of much smaller locations qualified to handle the iPhone Pro.

Its main alternative is a smaller plant in Guangdong province, Lam said. Some of Foxconn’s plants in other parts of China haven’t been running at full capacity due to reasons including COVID disruptions, Peng said.

Bloomberg

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