How Might COVID-19 Impact Apple’s Supply Chain Jan 29
GLG sat down with Jay Goldberg to discuss his insight into how COVID-19 might impact Apple’s supply chain. Jay is the founder of D2D Advisory, a consulting firm that helps clients achieve their long-term strategic financial goals. He has held senior strategy and corporate development roles with Qualcomm and Peregrine Semiconductor. Previously, Jay was a senior equity research analyst at Deutsche Bank, covering mobile and data networking. He lived in China for almost 10 years and has a deep understanding of the electronic supply chain in Asia.
GLG: Most iPhones are made in China by Hon Hai Precision and assembled by Pegatron. Where are these sites located in respect to Wuhan? How might they be affected by the COVID-19 outbreak?
Jay: For simplicity’s sake, I’m going to refer to Hon Hai using its trading name, Foxconn. The group has operations spread around China. The main facilities are located in Shenzhen in South China and Zhengzhou in Central China. They do have a smaller facility in Wuhan. Shenzhen is more than 1,000 miles from Wuhan, but Zhengzhou is close, in neighboring Henan province about 300 miles from Wuhan. Right now, the plant in Zhengzhou does not appear to be affected. The facility in Wuhan has been closed. But it’s still early. How the virus eventually spreads will determine the outcome of how broad the impact is.
Pegatron has a big facility on the outskirts of Shanghai and another small facility in Suzhou, about 70 miles west of Shanghai. These are far from Wuhan, but there are reports that the area has been affected, with reports of other companies closing facilities in the area. Reports from Shanghai say that people are staying home. It’s quiet on the streets. There are two factors at work. First is official requirements: the extended holiday, travel restrictions, etc. The second factor will be public perception. Here it looks like people are being even more cautious, which is going to affect transport systems and staffing levels as well.
GLG: Are there any other pieces of the supply chain that could be more immediately affected?
Jay: Headline components like silicon or the screen are made outside of China and then imported and assembled in country. There are a fair share of components, like the cameras or the audio subsystem, that are created in China. These kinds of companies have big facilities, some of which are in Western Shanghai around Wuxi, places where we’re seeing reports about factory closures. These tier two category components are most likely to show signs of vulnerability. The other vulnerability is in packaging facilities around China. These may be affected and cause disruptions to the supply chain.
GLG: Foxconn has stated that they have contingency measures to protect against production lapses. What might these look like? How confident are you in them?
Jay: My guess is that Foxconn is relying on geographic redundancy. They have plants all over China. If one shuts down, they can shift production to another. But my faith in that is somewhat limited. I don’t think it’s ever really been tested, and I’m not sure how efficiently they can switch over that quickly.
Another thing to consider. What if the virus spreads even further? Then we have massive shutdowns across multiple regions. It’s an extremely small but non-zero chance that we’ll see a prolonged national shutdown. More shutdowns might mean geographical redundancy flies out the window. This is particularly true if the virus spreads in Guangdong province where the electronics industry is heavily concentrated. So far, this area seems to be seeing less impact from the virus. It is going to be very hard to gauge the true spread of the disease, but I am keeping an eye out for developments in and around Shenzhen.
There’s also something else to consider. There is typically a lot of churn in headcount for the whole supply chain after Chinese New Year. People go home for Chinese New Year and they see their friends. Their friends work in a much better place than they do, so they quit, and they go work for their friend’s company. Given that the Chinese New Year holiday has been extended due to the virus, I think there is some likelihood that labor problems will start to become an issue once everything comes back to running up to normal. This means that there may be added delays as companies turn production back on again. When everyone goes back to work, it’s going to add another week as they reorient the workforce and fill holes.
GLG: In your estimation, Which Apple products are most at risk due to shutdowns?
Jay: I’m going to go with iPad because I’m pretty sure that production is all done in Zhengzhou and I think that’s one of the most at risk provinces. If the virus spreads to South China, then it’s the iPhone. If we start to see a lot of cases in Guangdong and Shenzhen, that’s when we start getting concerned for iPhone.
About Jonathan Jay Goldberg:
Jay Goldberg is the Founder of D2D Advisory a consulting firm that helps clients achieve their long term strategic financial goals. He has held senior Strategy and Corporate Development roles with Qualcomm and Peregrine Semiconductor. Prior to this Jay was a Senior Equity Research Analyst with Deutsche Bank covering Mobile and Data Networking. Jay lived in China for almost ten years and has deep ties to the Electronics Supply Chain in Asia.
This article is adapted from the GLG Teleconference “COVID-19’s Impact on Apple’s Supply Chain.” If you would like access to this teleconference or would like to speak with Jay, or any of our more than 700,000 experts, contact us.
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