Apple Inc. is warning investors that it won’t meet its second-quarter financial guidance because the viral outbreak in China has cut production of iPhones.
The Cupertino, California-based company said Monday that all of its iPhone manufacturing facilities are outside Hubei province, the epicenter of the outbreak, and all have been reopened.
But the company said production is ramping up slowly.
‘The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues,’ Apple said in a statement.
‘Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated.’
The death toll from COVID-19, a disease caused by the new coronavirus, was 1,770 as of Monday.
Apple says demand for iPhones is also down in China because many of Apple’s 42 retail stores there are closed or operating with reduced hours.
A man is seen above cycling past a closed Apple store in Beijing on February 8
China is Apple’s third largest retail market for iPhones, after the United States and Europe.
Outside China, Apple said iPhone demand has been strong and is in line with the company’s expectations.
On January 28, Apple said it expected second quarter revenue between $63billion and $67billion.
Apple’s second quarter ends March 30.
Apple says the situation is evolving and it will provide more information on its next earnings call in April.
Few American firms are as tightly bound to Asia’s largest economy as Apple.
Contract factories owned by Hon Hai Precision Industry Co Ltd’s Foxconn, Pegatron Corp, Wistron Corp and others employ hundreds of thousands of workers to assemble Apple devices.
In recent years, Apple’s contract manufacturers have expanded into other countries.
But the factories outside China are smaller and, in the case of India and Brazil, Apple only uses them to meet domestic demand.
Apple’s contract factories inside China, meanwhile, have added far more locations than outside, with Foxconn alone expanding from 19 locations in 2015 to 29 in 2019 and Pegatron going from eight to 12, according to Apple’s data.
The new locations come as Apple has added watches, smart speakers and wireless headphones to its product lineup.
And beyond the contract factories, the rest of Apple’s suppliers – the companies that sell it chips, glass, aluminum casings, cables, circuit boards and much more – became more concentrated in China.
Apple employees wear face masks as they stand in a reopened Apple store in Beijing on Friday
Among all supplier locations, 44.9% were in China in 2015, a proportion that rose to 47.6% by 2019, the data showed.
Apple faces hurdles in diversifying beyond China, where the clustering of multiple suppliers allows it to make hundreds of millions of devices per year while holding only a few days’ worth of inventory, which is critical to the free cash flow Apple investors prize.
Other phone makers ship far fewer units and have more flexibility.
Last year, Alphabet Inc’s Google shifted its Pixel smartphone production to Vietnam from China as it builds a cheap supply chain in Southeast Asia.
But Apple’s scale works against it because few other nations have workforces as large as China.
Outside of China, ‘there few places in the world that have the infrastructure to produce 600,000 phones a day,’ said Dave Evans, chief executive of San Francisco supply chain firm Fictiv.