Apple, iPhone and China: Short-term problems require a long-term solution

Apple’s iPhone production issues in China add another chapter to the breakdown of previous supply chain models, lingering political tensions and disaster exposure; all highlighted the need to diversify into all aspects of manufacturing to become more resilient.

Crisis management is no mean feat

The impact of these challenges on Apple means the company may have lost millions in iPhone sales in the current quarter. It’s a challenge, but Apple is by no means alone in 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 there has obviously failed, likely to the detriment of all of us. Certainly, the current meltdown of crises shows that the future of manufacturing must be multi-site and international.

Building the future supply chain

That’s why I think Apple, and I imagine every other company, will develop plans to double or even triple the manufacturing centers in their chains. This means that Apple and TSMC can manufacture advanced processors at the new factory in Arizona as they at the same time also do fries elsewhere. They will want multi-source strategic components – 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 building it.

I also think the need to build such resilience might turn out to be one of the reasons why we suddenly hear that new products (Apple Car, glass of apple) may not appear until 2026 and late 2023, respectively, rather than the earlier dates previously discussed. Apple will want to take the time not only to develop the products, no matter how complex, but also to develop these more resilient manufacturing and supply chains, not to mention building increasingly circular manufacturing capabilities. (That Apple car you’re driving after 2026 might contain more recycled raw materials than anything else on the road.)

Change doesn’t come cheap

All of this activity will almost certainly result in more expensive products. You cannot build a resilient, distributed, doubled system that is as efficient as a less resilient “just-in-time” system for the same price, which means production costs will increase.

It’s not just about reconfiguring supply chains. Prices will also rise due to inflation, increasingly expensive energy costs, raw materials and logistics, and the need to raise wages to keep pace with inflation. But all of these issues are long-term in a time of transition where a series of events have taken place to test the soundness 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 are warning that iPhone 14 sales will be hit by a shortfall of up to 20 million units following problems at Apple partner Foxconn’s iPhone production plant. These challenges have arisen in response, we are told, to China’s COVID-zero policies, which may now have been relaxed slightly. All the same, for the current quarter, the damage is done.

Morgan Stanley analyst Erik Woodring in a note to clients provided insight into the extent of the damage. It cut iPhone estimates by 11%, but kept its 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 points out that this is a fairly conservative model, given that the company’s Greater China Hardware team estimates only 1-2 million lost iPhone sales. Still, he warns that Apple’s December revenue could hit consensus by 3%, to around $120.3 billion.

Should Apple be worried?

In the short term, we know the company is worried as it issued a rare warning to investors once it realized how fragile things had become. At the same time, it is also seeing relatively strong demand for all of its hardware products, while most competitors are experiencing declines. This effectively indicates that the company has the luxury of a loyal customer base and demand, and that will be what Apple will look to as it moves forward.

Apple management has consistently explained this approach over the years. Sure, it may become a little more disciplined in recruiting, but it will continue to invest in R&D and try to navigate the ocean of change to all new product paradigms that have become relevant in the post- crisis.

It’s what the company has always done, and as nearly every business finds itself 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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