Apple's iPhone production woes in China add another chapter to the breakdown of supply chain past models, lingering political tensions and exposure to disasters; all highlighted the need to diversify into all aspects of manufacturing to be more resilient.
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Crisis management is no small thing
The impact of these challenges on Apple means that the company may have lost millions in iPhone sales in the current quarter. It's a challenge, but Apple isn't the only one relying on a supply and manufacturing ecosystem that has proven less resilient than we need in these changing times.
Yes, for Apple, the worker riots in China are not a good idea, and the attempt to control COVID-19 obviously failed, probably to the detriment of all of us. Indeed, the current meltdown of crises shows that the future of manufacturing must be multi-site and international.
Building the supply chain of the future
That's why I think Apple, and I imagine all the other companies, will develop plans to double or even triple the manufacturing centers in their chains. This means Apple and TSMC can build advanced processors at the new Arizona factory while making chips elsewhere. They will want strategic components from multiple sources, and hardware assembly, to provide a bulwark against any future catastrophe. Building this kind of resilience will take time, but Apple is well on its way to doing it.
I also think that the need to build such resilience may become one of the reasons why we suddenly hear that new products (Apple Car, Apple Glass) might not appear until 2026 and late 2023, respectively, instead of the dates previously discussed above. Apple will want to take the time to not only develop the products, no matter how complex, but to build these more resilient manufacturing and supply chains, not to mention creating increasingly circular manufacturing capabilities. (That Apple car you drive after 2026 might contain more recycled raw materials than anything else on the road.)
change is not cheap
All of this activity will almost certainly result in more expensive products. You cannot build a resilient, distributed, duplicated system that is as efficient as a less resilient “just in time” system for the same price, which means production costs will increase.
It is not just about reconfiguring supply chains. Prices will also rise due to inflation, the rising costs of energy, raw materials and logistics, and the need to increase wages to keep pace with inflation. But all of these issues are long-term at a time of transition where a series of events have occurred to test the robustness of existing systems. Points of failure will be recognized and improved over time.
You need long-term solutions to solve these problems
For now, analysts warn that iPhone 14 sales will be hit by a shortfall of up to 20 million units due to problems at Apple partner Foxconn's iPhone production plant. These challenges have arisen in response, we are told, to China's zero-COVID policies, which may now have been relaxed somewhat. Still, for the current quarter, the damage has already been done.
Morgan Stanley analyst Erik Woodring in a note to clients provided information on the extent of the damage. He cut iPhone estimates by 11% but kept his estimate for the next quarter at 56,5 million units. He maintains (unlike analyst Ming Chi Kuo) that most sales will be delayed until next quarter, but now pegs shipments for the current quarter at around 75,5 million.
The analyst notes that this is a fairly conservative model, given that the company's Greater China Hardware team estimates that only 1-2 million iPhone sales were lost. Still, he cautions that Apple's December revenue could hit the consensus by 3%, to around €120,3 billion.
Should Apple be concerned?
In the short term, we know the company is concerned, having issued a rare warning to investors once it realized how fragile things had become. At the same time, it's also seeing relatively strong demand for all of its hardware products, while most competitors are seeing declines. This effectively indicates that the company has the luxury of a loyal customer base and demand, and that will be what Apple will be looking for as it moves forward.
Apple management has consistently explained this approach over the years. Sure, you can get a little more disciplined in recruiting, but you'll continue to invest in R&D and try to navigate the ocean of change toward all the new product paradigms that have become relevant post-crisis.
It's what the company has always done, and as almost every business is forced to deal with increasingly complex headwinds, Apple will show how to implement the necessary business changes. Others will eventually follow.
Why? Because they usually do.
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