Apple. Picture: REUTERS
Apple. Picture: REUTERS

San Francisco/Shanghai — Apple’s surprise warning that it will probably fall short of this quarter’s sales target due to coronavirus points to pain for its chip and other suppliers as well as for rivals who also rely on China to build their products.

Revising guidance set just three weeks ago, the world’s most valuable tech company said that while many factories making iPhones had reopened for work, but they were ramping up more slowly than expected.

The outbreak, which has infected more than 72,000 and prevented many employees from returning to work due to travel and quarantine restrictions, was reverberating throughout the US company’s supply chain, a source familiar with Apple’s operations in China said.

“If one component factory stays closed and they’re the only supplier, then everyone has to stop and wait. And if there are two suppliers and one is shut down, then we need the other to do more,” said the source who was not authorised to speak to the media and declined to be identified.

Stacy Rasgon, a Bernstein analyst, said Apple’s woes probably meant fewer chips would be sold in the mobile device industry because the overwhelming majority were made in China.

“Maybe this is the wake-up call. I would be astonished if Apple is the only one,” he said. “Every electronic supply chain runs through China in a big way.”

Research firm Canalys estimates that Apple, which outsources much of its manufacturing to Taiwan’s Foxconn, and rival Huawei Technologies have 99% of their production in China. Sales in the world’s biggest smartphone market is likely to halve in the first quarter due to the virus, analysts have said.

Chinese rivals Oppo, Xiaomi and Vivo have 83%, 72%, and 65% of their production in China respectively.

Reuters reported last week that about 10% of Foxconn’s workers in China have resumed production, while other plants in the country remain largely shuttered. Foxconn denied the reports in a company filing without elaborating.

Vulnerable to disruptions

Share prices of Apple’s chip suppliers fell on the news on Tuesday, with Samsung Electronics losing 2.8%, Taiwan Semiconductor Manufacturing Co (TSMC) down 2.9% and SK Hynix shedding 2.9%.

Analysts at ANZ said Qualcomm was vulnerable to disruptions caused by the epidemic as it supplied mobile modem chips to almost all major smartphone makers and generated nearly half of its sales from China.

US-based suppliers doing a lot of business with Apple include Broadcom, Qorvo and Skyworks Solutions.

Broadcom makes a range of wireless components for iPhones, and said last month it had signed a deal to supply Apple for contracts of as much as $15bn. Sales to Apple accounted for 20% of its annual revenue in fiscal 2019.

Qorvo, which sells parts that help phones connect to wireless data networks, generated about one-third of its revenue from Apple in fiscal 2019. Skyworks, another wireless component supplier, got more than 10% of its annual revenue from Apple.

Other US suppliers to Apple include Texas Instruments. Its battery-charging chips have been found in iPhone teardowns, though the company sells across a broad spectrum of the electronics industry.

In Europe, the Netherlands’s NXP Semiconductors supplies Apple with the near-field communications chips used in the iPhone’s Apple Pay contactless payments feature, according to TechInsights teardowns and industry analysts.

Chips made by Franco-Italian firm STMicroelectronics are used for wireless battery charging and for infrared cameras in iPhones, according to teardowns. Its share price fell; 3.5% in morning trade.

Investors in chipmakers had until now been willing to look past temporary coronavirus disruptions, hoping for a sales recovery in the second half, said Bernstein’s Rasgon.

Mike Fawkes, who previously ran supply chain operations for Hewlett-Packard, said that even if it wanted to Apple was unlikely to find alternative production sources soon.

“They’re stuck with China for some period,” he said. “It’s very hard when you’re managing a big battleship like they are.”

Reuters