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Coronavirus-linked labor shortages threaten iPhone production: sources

Tech supply chains brace for severe impacts even after holiday ends on Feb. 10.

Photo by Javier Esteban on Unsplash Photo by Javier Esteban on Unsplash

Key Apple suppliers are bracing for severe labor shortages due to the coronavirus outbreak as travel restrictions are expected to keep tens of thousands of workers stranded in their hometowns even after the extended Lunar New Year holiday ends on Feb. 10, multiple sources told the Nikkei Asian Review.

The sources say the shortages could hamper Apple’s plans to ramp up iPhone production. The California tech giant previously ordered suppliers to make up to 80 million iPhones for the first half of 2020, as first reported by Nikkei.

“This is new to everyone. … We have to deal with it with pain,” an iPhone supply chain executive told Nikkei. “The imminent issue is not whether we are able to recruit workers or not, but whether those workers can leave their towns due to many traffic restrictions,” the executive added. “We don’t have enough workers at the moment.”

The Lunar New Year holiday is a peak travel time in China when millions of migrant workers return home to see their families. Many local government authorities extended the holiday by 10 days this year to try to combat the deadly virus, which has already infected more than 20,000 in the country.

The impact from the coronavirus on the global tech industry, which had high hopes for a recovery in 2020, could be serious, with analysts warning that it could drag global smartphone shipments down by as much as 10% this year.

Apple suppliers bracing for trouble include Foxconn and Pegatron — the two biggest iPhone assemblers — as well as many components makers.

Assemblers tend to maintain very low production rates during the Chinese New Year and gradually pick up after the holidays. Pegatron has slowly picked up the pace of iPhone production since the end of January, two sources said, while Foxconn aims to raise its utilization rate back to at least 50% or so next week when it officially resumes work, one source familiar with the plan said. But the expected staff shortages would slow the usual pace of increase.

The inventory of iPhones, especially the iPhone 11 model, is low, which means it even more pressing for supply chains to get back up to speed, two sources with direct knowledge of the matter said.

Although the holiday is scheduled to end on Monday in many Chinese cities, some local authorities are urging factories to delay their production further. Foxconn, however, has secured a green light from local authorities in cities like Shenzhen, and Zhengzhou, where the biggest iPhone production base is located, one of the sources said.

Staffing issues, however, are just one concern facing suppliers — how to keep their sprawling complexes free of the coronavirus is another.

“We have learned that once there is one employee confirmed to have been infected with the coronavirus, the whole factory will have to halt while disinfection is carried out,” said a component supplier to Apple and Huawei that has production sites in China. “That could cause big uncertainties and risks for operation and it becomes very difficult for us to decide if we want to allow as many people as usual to work in the factories.”

Electronics assembly is labor intensive. Foxconn employs around 430,000 production line workers, while smaller peer Pegatron has around 200,000 during its peak season. With tens of thousands of employees living and working together at massive campuses, preventing an outbreak presents a major challenge.

“Whether we can really resume work on Feb. 10 is a big question mark, as it seems the acceleration of confirmed cases has not slowed down yet,” another Apple supplier source told Nikkei. “Even if we restart the production, we are not confident enough to ward off coronavirus as it is hard for us to track the returned workers’ travel history and their body temperature changes in the past two weeks. … There’s too many risks to control.”

Foxconn said it plans to resume operations on Feb. 10 and has measures in place to ensure that it can continue to meet all global manufacturing obligations.

“Having previously dealt with SARS, Foxconn has a good understanding of how to care for our employees’ health and how we will need to allocate resources in the manufacturing and production departments to ensure that the company is able to address the needs of both our employees and customers,” the company told the Nikkei in an email response.

Pegatron, which plans to resume operations on Feb. 10, said maintaining employees’ health is the company’s top priority and it has established “direct communication channels” with local governments to comply with regulations. “We’ve also activated measures for epidemic prevention to ensure a safe working environment,” it told Nikkei.

Apple declined to comment for this story.

Apple CEO Tim Cook said in an investors conference that the impact of the coronavirus is not clear at the moment and given the reopening of most of the factories in China has been postponed to Feb. 10 Apple has “attempted to account for this delayed start-up through our larger range of outcomes.”

Like Apple, top Android smartphone makers including Huawei Technologies, Oppo, Vivo, and Xiaomi, and notebook makers such as HP and Dell also have the majority of their production in China. Only Samsung Electronics, with its massive campus in Vietnam, has fully shifted smartphone production out of China, though it still sources components from the country.

Other tech-related manufacturers in China, including robotic companies and automakers, have also expressed concern over a long-term disruption, with some saying there is no clear sign of when their production will return to normal.

The slowdown in manufacturing, combined with plummeted spending in tourism, retail, and other consumer-focused sectors, is expected to hamper Beijing’s hope of reviving its economy, at least temporarily. Economic growth is estimated to fall to 5.4% this year from 6.1% in 2019 due to the virus, UBS chief China economist Wang Tao warned in a report published on Monday.

The virus outbreak comes just as the tech industry was hoping for a reprieve from trade tensions as the US and China finally inked a Phase-One trade deal to cool tensions. China reported on Feb. 5 that the number of confirmed cases in the country had reached nearly 25,000 while deaths totaled 490.

And while many tech companies have said they will restart operations on Feb. 10, even that is in question.

“If component and material makers resume production later than Feb. 10, it could become a big problem for the whole supply chain. … Many key components, including printed circuit boards, passive components, casings, and paper packaging are still mainly in China. … Without one of these you could not ship the product,” a supply chain executive told Nikkei. “That could cause massive delay and disruption in the electronics industry.”

Smaller tech companies are also anxious about protracted supply chain disruption. Jasen Wang, CEO of Shenzhen-based robotics company MakeBlock, told Nikkei that his suppliers and contract manufacturer have yet to say when they will resume production despite the fact that the Chinese New Year holiday is expected to end in less than a week.

“We have no idea when they will restart working or how long their production could last for,” Wang said, adding that the decision is closely linked with the progress in combating the coronavirus outbreak.

“Even if factories do go back to work, they might not be able to run at full capacity as it is too risky to have so many people working together,” Wang said. The epidemic has also given Chinese factory workers — many come from the countryside and visit their family only during the Lunar New Year — a good reason to delay their return, Wang said, adding that all of these factors have resulted in a “big disruption” to his production.

Several hundred miles north of Shenzhen, executives of Guiyang-based Pix Moving also believe their trouble is unlikely to end anytime soon. Although the auto startup can resume its operation on Feb. 10, its engineers cannot get the components they need for their work, CEO Angelo Yu said.

That is because Wuhan, the epicenter of the deadly virus and a key manufacturing hub for the Chinese auto industry, has suspended all the production until Feb. 24 to curb the spread of the coronavirus. Pix Moving’s suppliers are no exception, and Yu said he worries Wuhan may extend the suspension further. Seeking alternative suppliers, however, is not an easy option.

Yu also faces similar challenges as Foxconn and other tech giants. He said some of his employees have been stranded in their hometown due to the travel restrictions, while others refused to leave home as they had nowhere to purchase face masks and do not feel safe to go out without proper protection.

“So far, only half of our employees have managed to return to Guiyang,” Yu said.

Analysts say coronavirus-caused labor shortages and other problems will undoubtedly hit the tech industry, which had previously had high hopes for a healthy recovery in 2020. The Wuhan coronavirus will drag smartphone shipment for the whole year down by 5-10% given the negative impact for the first quarter of 2020, according to an estimate from Yuanta Investment Consulting.

“Smartphone launches in the second quarter of 2020 could also face delays. … But this virus outbreak will surely push more companies to make up their minds to facilitate diversification plans outside China,” the consultancy said in its latest report on Monday.

This article first appeared on Nikkei Asian Review. It’s republished here as part of 36Kr’s ongoing partnership with Nikkei. 36Kr is KrASIA’s parent company.