By Stephen Nellis and Josh Horwitz
SAN FRANCISCO/SHANGHAI (Reuters) – Apple Inc’s <AAPL.O> surprise warning that it will likely fall short of this quarter’s sales target due to the coronavirus epidemic points to much 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 while many factories that make iPhones have reopened for work, they were ramping up more slowly than anticipated.
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 U.S. firm’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 authorized to speak to media and declined to be identified.
Stacy Rasgon, a Bernstein analyst, said Apple’s woes probably also mean fewer chips will be sold throughout the mobile device industry because the overwhelming majority are 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 both Apple, which outsources much of its manufacturing to Taiwan’s Foxconn <2317.TW>, and rival Huawei Technologies [HWT.UL] have 99% of their production in China. The world’s No. 1 smartphone market is likely see sales halve in the first quarter due to the virus, analysts have said.
Chinese rivals Oppo, Xiaomi Corp <1810.HK> and Vivo have 83%, 72%, and 65% of their production in China respectively.
Reuters reported last week that roughly 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.
A SLEW OF SUPPLIERS
Shares of Apple’s chip suppliers fell on the news on Tuesday, with Samsung Electronics <005930.KS> losing 2.8%, Taiwan Semiconductor Manufacturing Co (TSMC) <2330.TW> down 2.9% and SK Hynix <000660.KS> shedding 2.9%.
Analysts at ANZ noted Qualcomm Inc <QCOM.O> was vulnerable to disruptions caused by the epidemic as it supplies mobile modem chips to almost all major smartphone makers and generates nearly half of its sales from China.
U.S.-based suppliers that do a lot of business with Apple include Broadcom Inc <AVGO.O>, Qorvo Inc <QRVO.O> and Skyworks Solutions Inc <SWKS.O>.
Broadcom makes a range of wireless components for iPhones and said last month it had signed a deal to supply Apple for contracts worth as much as $15 billion. 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 around 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 U.S. suppliers to Apple include Texas Instruments Inc <TXN.O>. Its battery charging chips have been found in iPhone teardowns, although the company sells across a broad spectrum of the electronics industry.
In Europe, the Netherlands’ NXP Semiconductors <NXPI.O> 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 <STM.MI> <STM.PA> are used for wireless battery charging and for infrared cameras in iPhones, according to teardowns. Its shares lost 3.5% in morning trade.
Investors in chipmakers have until now have 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 even if it wanted to, Apple was unlikely to find alternative production sources soon.
“They’re stuck with China for some period of time,” he said. “It’s very hard when you’re managing a big battleship like they are.”
(Reporting by Stephen Nellis in San Francisco and Josh Horwitz in Shanghai; Additional reporting by Hyunjoo Jin in Seoul; Editing by Greg Mitchell, Miyoung Kim and Edwina Gibbs)