Nov 7, 2022 - Economy

Apple squeezed by COVID lockdowns in China

Illustration of a hand squeezing an iPhone with sparks coming out.

Illustration: Aïda Amer/Axios

Wait times for Apple's newest iPhone 14 Pro models are getting longer as new COVID lockdowns in China hamper production.

Why it matters: The latest Pro models are the priciest of the iPhones — the single most important device to one of the most profitable companies in the world.

  • The new constraints are also hitting Apple during its most crucial time of the year — the holiday quarter — and as iPhone demand slows down.

Driving the news: A spike in COVID cases in China has prompted officials to restrict activities in cities including Zhengzhou — where Apple manufacturer Foxconn is "currently operating at significantly reduced capacity," Apple said in a statement on Sunday.

  • Apple also said it continues to see "strong demand" for the higher end phone models.

By the numbers: Bank of America analysts estimate the Zhengzhou facility is operating at 50% and that it could ramp back to 70% by the end of the month and 100% in December.

  • The research team also lowered its iPhone shipment estimates for the quarter from 84 million to 78 million, saying that the 6 million deficit is likely spread equally between the Pro and Pro Max.
  • As a result, the average selling price for the iPhone unit would move down to $889 compared to $900 previously.

The big picture: Chinese officials have slowly and incrementally dialed back its zero-COVID policies, Brendan Ahern, chief investment officer of KraneShares, tells Axios.

  • Due to a lower rate of vaccination among the elderly in China, the Omicron variant could have killed 1.5 million elderly people in China, which would have overwhelmed the healthcare infrastructure, says Ahern.
  • At the same time, reports show there's been a heavy psychological and economic toll from the policies.

Apple’s size makes it the most significant company to publicly cry uncle over China’s “zero COVID” policy, but it’s emblematic of broader financial concerns stemming from the restrictions, Niagara University economist Tenpao Lee tells Axios' Nathan Bomey.

  • “They face tremendous economic pressure” to switch gears “from almost all industries, all companies,” Lee says, noting that China is at risk of continuing to stoke inflation while also tipping into a recession.

Be smart: In Asia, the Chinese government isn't alone in continuing COVID precautions and officials are trying to take a more targeted local approach.

  • Some travelers with COVID-19 may be taken to a government designated quarantine facility in South Korea for example.
  • In Japan, "face masks are almost universally worn in public," and Taiwan travel rules state that people "who test positive abroad are required to wait over seven days from their specimen collection date before taking a flight to Taiwan."

What to watch: "All the signs are pointing to the beginning of preparation for an eventual reopening, especially given the rising cost of the 'dynamic zero-Covid' policy for the economy," Goldman Sachs analyst Hui Shan wrote in a note today.

  • "However, the actual reopening is still months away as elderly vaccination rates remain low and case fatality rates appear high among those unvaccinated."
  • Our thought bubble: As for Apple's situation, we'll be watching to see whether workers at the plant will leave during any hiatus in lockdowns, as well as just how much Apple's fiscal first quarter earnings are hurt by a lack of iPhones to sell. Apple may shift production even more now away from China and into new facilities in India.

Go deeper: Slowdown in China ripples through corporate earnings

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