Apple: The China problem is gaining momentum

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iPhone: It could be missing six million or more

Photo: Chukrut Budrul / SOPA Images / LightRocket via Getty Images

In northern China, on the outskirts of the industrial city of Zhengzhou, lies an area that locals just call "iPhone City."

It is a gigantic factory complex, with ten-story apartment blocks for the approximately 200,000 people who work here, separated from the city by a network of freeways and bushland.

Here, the Apple supplier Foxconn operates the largest iPhone factory in the world.

Recently, disturbing images from "iPhone City" have been circulating on social media: factory workers fleeing, protests, riots, law enforcement officers in white suits, some of whom are trying to use violence and tear gas to ensure peace.

After a corona outbreak, the campus in Zhengzhou was sealed off for weeks;

Employees in the factory town complained about withheld wages and bonuses and about the strict corona restrictions.

There were reports of catastrophic living conditions, regulated production was unthinkable - the iPhone factory became one of the centers of the recent unrest across China.

Although the Chinese authorities officially lifted the lockdown on Tuesday evening and the Foxconn group is luring workers back with bonus payments and higher salaries, the tension remains.

The protests reveal something else besides the brutality of the regime's zero-Covid strategy: Apple's dependence on China.

The uprising in the iPhone factory hits the US giant economically in the most important quarter of the year - and at the same time morally undermines the clean image of the flagship company from Cupertino.

In short: CEO

(62) has a problem with China.

"This month's Apple Zero Covid situation may be the final straw for Cook and Cupertino in their China expansion plans," tweeted renowned tech analyst and Wedbush CEO

in this week.

The attitude of the Chinese government is "untenable", for manufacturing companies China is becoming the "Twilight Zone".

"Time for a change of direction."

Production loss in the millions

Apple has had a close partnership with Foxconn for years.

The Taiwanese group is a contract manufacturer for 70 percent of the iPhones worldwide, most of which come from the complex in Zhengzhou.

"Designed by Apple in California assembled in China" is written on the devices.

After a corona outbreak in October, however, the plant was sealed off and the employees could not get out.

After a mass exodus and the first uprisings at the end of October, the situation deteriorated dramatically again in the past week – production largely came to a standstill.

"iPhone production has been operating at about 20 to 30 percent of capacity for the past few months," analysts Daniel Ives and

wrote in a report.

Economically, this is definitely noticeable for the group.

The Foxconn facility produces the vast majority of iPhone 14 Pro and Pro Max devices.

Depending on the equipment, the Pro models cost between 1300 and 2100 euros each in Germany, they have caught the slack for the falling demand for the regular iPhone 14 models.

Now an unprecedented iPhone bottleneck is spreading worldwide.

"Each week of this shutdown and rioting costs Apple roughly $1 billion in lost iPhone sales, by our estimates," Ives said.

He estimates the failures worldwide to be around 5 percent.

And depending on the further course of the crisis, Apple could also lose more than ten percent of the units sold worldwide.

According to his report, many Apple stores, retailers and online channels will be empty-handed for most iPhone 14 Pro models until at least early January.

An insider is said to have told the Bloomberg news agency that the failure was at six million units – that would correspond to almost 12 percent of the iPhones delivered in the third quarter.

Apple itself issued a rare warning back on November 6 that its Zhengzhou factory had "significantly reduced capacity" for production of the high-end iPhone 14 Pro and Pro Max models.

How big the outage actually is now depends on when Foxconn can get employees back on the assembly lines after the violent protests.

Apple CEO Cook recently reduced his overall production target by three million units to around 87 million.

As a result, the analysis company Evercore ISI lowered its sales forecasts for the December quarter by USD 8 billion to USD 122 billion this week.

If that happens, sales would be below the $124 billion reported a year ago -- the first year-over-year decline since early 2019.

China's power

The tumult in "iPhone City" once again reveal how dependent Apple is in the supply chain of China.

"Apple's biggest challenge is that they can't diversify away from China fast enough," said

, an analyst at investment bank DA Davidson, told the Financial Times.

CEO Cook has been trying for a long time to become less dependent on production in China.

Recently, the tense relationship between the governments in Beijing and Washington due to the Taiwan conflict apparently increased the pressure to relocate production to other countries.

iPad tablets and AirPods headphones, among other things, are already produced in Vietnam as the most important production center outside of China.

In addition, the US technology group also has a small part of the iPhone 14 manufactured in India – also by Foxconn, by the way.

The Wall Street Journal quotes an analyst as saying that production there could increase by 150 percent in the coming year.

In the long term, 40 to 45 percent of iPhones could come from India,

so the prognosis;

currently it is 4 percent.

And locations such as Brazil or Southeast Asia could further contribute to the diversification of Apple products.

Lesson learned from the uproar: "Apple is being forced to accelerate the diversification of its manufacturing base,"

, an analyst at Asymmetric Advisors, told Bloomberg.

But a quick departure from China seems out of the question.

In early November, Bank of America wrote in a note that it will take many years for Apple to diversify a significant part of its production.

For now, the dependency on China is gigantic.

It's no wonder that Cook isn't straining relations with the government in Beijing and isn't provoking head of state

(69).

Although other US tech companies stayed away from China or withdrew again, the Apple boss continued to rely on the People's Republic.

In 2016, he met with government officials in Beijing and pledged to invest $275 billion in the country over five years.

And it was only this summer that he sparked outrage among US Republican politicians in the United States after giving the state-owned China Daily an allegedly servile interview in which he was impressed by the creativity of Chinese IT developers, "to enrich people's lives".

In the course of the current protests, Apple has come under renewed criticism.

About three weeks ago, as part of an update for the operating system on its devices, the group severely restricted the AirDrop function, with which files can be transferred to other devices in the immediate vicinity via Bluetooth or WLAN.

From now on, users can only receive files from non-contacts within ten minutes.

The spicy thing: demonstrators in particular had increasingly sent each other political messages via AirDrop in order to circumvent the strict surveillance of the state.

Critics accuse Apple of submitting to the regime with the update.

Especially since this restriction was only introduced in China.

The group does not comment on this.

One thing is certain: the reputation of the Apple group has been scratched by the uprising in China.

But how much pressure investors and investors will put on CEO Cook remains to be seen.

Currently, the turbulence and the iPhone bottleneck have put a little pressure on Apple shares.

But overall, the company is still worth $2.35 trillion -- and Apple is doing well compared to other tech stocks, too.

So far this year, it's only gone down around 12 percent. Even analysts Ives and Katsingris remain positive in the long term: "The stock market will see this production disaster for Apple mainly as a shift in iPhone timing and will not punish the stock in full."

Only Apple's China problem will remain.

For now at least.