China has long been a bedrock for Apple production. Reliable assembly lines, plentiful cheap labour, established supply chain networks. A producer's dream. Recent protests at Foxconn factories, Covid unrest, and geopolitical tensions put those assumptions to the test. Apple is our stock of the week.
Recent price action has been uninspiring. After the rally from the November lows, Apple’s share price is now stuck between the 20 day moving average/support in the region of $147, and a sequence of lower highs just below the 200 day moving average.
The situation with Foxconn is precarious. Prior to the widespread unrest seen across the country this weekend, workers had already been leaving en masse, frustrated by the closed loop Covid situation and pay deals that the company had apparently reneged on.
Foxconn is huge, and a key supplier for Apple. In 2021 alone, the company shipped 166.3 million iPhones. The plant in Zhengzhou is the largest in the world. Spread across 1.4 million square metres, it’s home to over 200,000 workers.
It’s easy to see how unrest at the facility could impact production. Tensions with workers have been building for some time due to the strict Covid restrictions.
In October, Foxconn banned dining at the on-site central cafeterias. Some workers were only provided with basic meals, while others were housed in dormitories with workers who were known Covid-positive cases. A real mess.
Many workers left the site. Transport was difficult due to their Covid status, but they were so fed up they simply walked along the roads. Their limit had been reached. More unrest followed after a pay dispute, with worker protests on-site turning violent, surveillance cameras and windows were smashed and security teams were sent in.
From a market perspective, these walkouts and clashes pose huge risks to Apple’s production lines. Reuters report that the unrest could cut November iPhone shipments by 30%, according to their sources.
Bloomberg separately reported that the unrest could lead to 6 million fewer iPhone Pros being produced.
Wedbush analyst Dan Ives says the shortages are already evident:
"iPhone shortages are accelerating and were front and center this morning on Black Friday across many retailers, Apple Stores, and online channels"
"We believe many Apple Stores now have iPhone 14 Pro shortages based on model or color or storage of up to 25%-30% below normal heading into a typical December, which is not a good sign heading into holiday season"
Entering a key sales period for the company, the supply disruption couldn’t come at a worse time. An iPhone for Christmas isn’t the same as an iPhone promised at Christmas but delivered in January.
If the predictions of a widespread downturn in the global economy next year come to pass, there may be little opportunity for Apple to catch up the lost sales too.
Zooming further out, this may accelerate the relocation of production facilities from China to India in coming years. In the near-term, supply uncertainty could weigh on Apple’s share price.
No es un consejo de inversión. El rendimiento pasado no es indicativo de resultados futuros.
