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Exclusive: Asian suppliers warn Apple about coronavirus impact

Planned 10% boost to iPhone production faces “massive uncertainties”.

Apple has asked its suppliers to make up to 80 million iPhones over the first half of this year, people familiar with its planning told the Nikkei Asian Review, a rise of over 10% on last year’s production schedule that could boost the company’s near-record share price.

Apple, which reports fourth-quarter results after Tuesday’s U.S. market close, has booked orders for up to 65 million of its older iPhones, mostly from the iPhone 11 series, and up to 15 million units of a new cut-price model that it plans to unveil in March. Apple ordered some 73 million iPhones over the same period last year, according to GF Securities data.

“This year is much busier than last year,” an industry source said.

However, suppliers warned that the blistering pace of production could be complicated by the outbreak of the coronavirus in China’s Hubei Province, given that their main manufacturing centers are in nearby Henan and Guangdong provinces, with more than 100 confirmed cases as of Monday afternoon, and in Shanghai, with over 50 confirmed cases.

“The [coronavirus] situation in China could affect the planned production schedule,” one supply chain executive, whose trip to China has been postponed due to the virus, told Nikkei.

Chinese authorities, who have locked down Hubei Province, said early on Tuesday that the SARS-like virus had so far claimed 106 lives on the mainland, with over 4,500 confirmed cases. But a team of British and U.S. scientists have provisionally forecasted that the virus could infect over 190,000 people by February 4.

By contrast, seasonal flu—another form of coronavirus—results in between 140,000 and 810,000 hospitalizations every year, and between 12,000 and 61,000 deaths worldwide, the U.S.’s Centers for Disease Control and Prevention estimates.

Apple’s aggressive push to boost iPhone production comes as the Cupertino, California-based company, the world’s most valuable by market capitalization, has adopted a new budget-conscious pricing strategy to boost sales in emerging markets.

The strategy switch came after iPhone sales, which account for half of Apple’s revenue, suffered two consecutive quarters of decline in the first half of 2019 and Apple CEO Tim Cook acknowledged “price is a factor.”

Apple’s latest iPhone 11 series, for example, was introduced last September at a starting price of USD 649, compared with the standard iPhone entry price of USD 700, despite improvements such as a better camera.

The new cut-price iPhone that Apple plans to unveil in March represents a continuation of the new cost-conscious approach. Mass production is due to start in the third week of February, although that schedule may change due to the virus outbreak, two sources familiar with the situation told the Nikkei Asian Review.

Apple shares, which have more than doubled in price over the past 12 months, touched a record high of USD 323.32 on Jan. 24, but have since fallen back due to virus-related fears. The stock closed down 2.9% on Monday at USD 308.95.

“With the upcoming cost-effective new iPhone this spring, and the better-than-expected demand for iPhone 11, it looks like Apple will have a better first half of this year compared with the same time a year ago,” Chiu Shih-fang, a smartphone and supply chain analyst at the Taiwan Institute of Economic Research, told Nikkei.

The U.S. ban last May on the use by China’s Huawei Technologies of Google apps on its smartphones, then the world’s second most popular, has also helped iPhone sales.

Suppliers added that Apple is also boosting production of its AirPods range of wireless earbuds, by up to 45 million units for the first half of this year. In contrast, Apple sold 60 million units of AirPods in all of 2019, according to Strategy Analytics. Apple has over 50% of the global market in the booming wireless Bluetooth earphone segment.

“Both suppliers and their client [Apple] are more aggressive this year than last year,” another iPhone supply chain executive told Nikkei.

However, executives stressed that the coronavirus has created “massive uncertainties and challenges” for the production of both iPhones and AirPods. As with its iPhones, most of Apple’s AirPods production is in China.

Terry Gou, founder of Foxconn, which trades as Hon Hai Precision Industry and is the world’s biggest maker of iPhones, said last week that he was extremely concerned about the virus, and warned that its rapid spread, abetted by mass travel during the Lunar New Year, could disrupt supply chains.

“We are considering whether or not to let employees return to China after the Lunar New Year holidays,” Gou told a news conference last week in Taipei, a day before Wuhan was locked-down and quarantined by Chinese authorities. Local staffing may be an additional problem, company sources have since told Nikkei.

Analysts warned that the virus could also hit China’s faltering economic growth rate, which in turn could hurt the local sales of consumer goods such as smartphones.

“China’s economy is already in a slowdown due to the U.S. trade conflict,” said Chiu of the Taiwan Institute of Economic Research. “If the Wuhan situation is not controlled, it could have a further impact.”

Apple declined to comment.

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