The coronavirus outbreak could be devastating for Apple

Beyond the human tragedy, has the outbreak highlighted a glaring weakness in Apple's supply chain?

It's February 1, 2020. As of a report at 6:02 am ET, the coronavirus death toll is at least 259. Globally, almost 12,000 people are reported to be infected. Since its detection in the Chinese city of Wuhan, cases of infection have been reported globally, including in the UK. The World Health Organization has declared the outbreak a global health emergency.

You might well remember the Sars epidemic that broke out in 2003. Also a coronavirus, Sars infected around 8,100 people over the course of eight months, this latest virus has surpassed that in just one.

And those are just the official figures, a mathematical model has led experts from the University of Hong Kong to suggest that more than 75,000 people may have been infected by the virus in Wuhan. Make no mistake, the coronavirus outbreak is a human tragedy, lives have been lost and may yet continue to be lost.

But everything is connected to everything. This means that beyond the loss of human life, the coronavirus could prove to be a real problem for Apple.

The Chinese city of Wuhan is a key manufacturing base in the country, a major producer of display panels. China as a whole is, of course, a manufacturing powerhouse. It's the heart and soul of Apple's supply chain. Aside from a small number of plants in India, and its Texas Mac Pro facility, Apple makes nearly everything it sells in China. It's estimated that the factory in China which carries out the final assembly of iPhones employs 230,000 people, more than the population of all but 83 US cities. The surrounding nations, for example Taiwan, are also key links in the Apple supply chain. Nearly all of the components required for final assembly in China itself are made in factories close by, or in neighboring countries.

Labor

The problems thrown up by the coronavirus outbreak are extensive. The most obvious and immediate problem for Apple (and all of the companies that use China as a manufacturing base) is the impact on the human workforce in the country. If the coronavirus continues at its current rate, the impact on the population could be tremendous. The Hubei province, in which Wuhan is situated, is home to 60 million people. China is an extensive country with an enormous population, so whilst it might be able to absorb the impact of a diminished workforce, there will still be an impact.

Beyond the workforce is travel and movement. As a recent Forbes report noted, the problem extends well beyond manufacturing in Wuhan. The virus has struck during China's Lunar New Year celebration, a time when most work stops and many citizens return home to celebrate. Willy Shih reckons that probably every factory in China's coastal manufacturing hubs has some workers who traveled home to Wuhan over the holiday. As you can imagine, the high population density, close working conditions, and dormitory accommodation make for ideal conditions when it comes to spreading a virus. As such, the re-opening of many of these factories has been delayed:

This year, a lot of people won't be coming back on time. Many companies have already announced that they are delaying reopening, and some cities or provinces like Shanghai and Guangdong have told companies operating there that they may not restart before February 9. But when they do come back, managers will have to worry about whether any of their workers have potentially been exposed to the virus and will need to be quarantined for two weeks. Imagine an even worse case if virus carriers are not identified and go out on the factory floor and infect others. This will be a nightmare.

Apple certainly seems mindful of the potential disruption afoot. During its earnings call on Tuesday, it issued wider-than-normal guidance for Q2 2020, revenue between $63.0 billion and $67.0 billion. During the call Tim Cook took questions on the outbreak, and said this:

As Luca had mentioned, we have a wider than usual revenue range for the second quarter due to the greater uncertainty. I'll talk about supply chain and customer demand some to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. For all of the suppliers, there are alternate sources and we're obviously working on mitigation plans to make up any expected production loss. We factored our best thinking in the guidance that we've provided you. With respect to supply sources that are outside the Wuhan area. The impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10th, depending upon the supplier location. And we've attempted to account for this delayed start-up through our larger range of outcomes that Luca mentioned earlier.

'An abundance of caution'

At the time Cook said this, Apple had announced the closure of one location, its Qinqdao store in the country. By Thursday, that number had become three, as Apple also closed stores in Nanjing and Fuzhou. Now, as of February 1, Apple has closed its entire operation 'out of an abundance of caution. That means all of its stores, corporate offices, and contact centers.

Closing all of its stores in the country, even for a few days, will obviously have a big impact on revenue. Apple has already limited business travel to "business-critical" situations as of last week, but with Apple slated to release a whole swathe of new products in the first half of 2020, you have to assume that this might have more far-reaching consequences. Could this impact meetings with suppliers and manufacturers? Will it delay decisions to be made about imminent product releases?

More importantly, the move from one store to three, to the entire Apple operation in China shows that the situation is still developing and volatile. It proves that the situation continues to escalate and may be moving forward at a pace that even Apple hadn't previously predicted.

"Out of an abundance of caution and based on the latest advice from leading health experts, we're closing all our corporate offices, stores, and contact centers in mainland China through February 9." Apple shuts down all of its ops in mainland China.

— Stephen Warwick (@StephenWarwick9) February 1, 2020

In a recent Ming-Chi Kuo note, he highlighted some of the wider issues that might be at play over the next few weeks. The first is dipping market confidence, with the impact likely to be felt in terms of device shipments, revenue for Apple, its manufacturers and suppliers of components will likely take a hit. The fortunes of many manufacturing and component supplying companies are tied inextricably to the fortunes of Apple, and vice versa.

As mentioned earlier, the most obvious and immediate effects of the coronavirus are being felt in terms of labor shortages, which could impact the shipment of new products. Kuo claims that the new iPad Pro, iPhone SE 2 and new Macs are all at risk. It seems that this is only a reference to availability, not delays to launches. However, there might be a point at which Apple decides that delaying a product might be preferable to launching it without enough inventory to sell.

Kuo also noted that the travel restrictions mentioned by Tim Cook might have a knock-on effect for product launches next year, as it could impact the schedule and roadmap of design decisions currently being made, particularly with regard to the first half of 2021.

It's very hard to find any good in all of this. Last year, Apple was forced to consider somewhat its need to diversify its manufacturing operations due to concerns over the US-China trade war. At the time, Foxconn told Bloomberg that it had the capacity to meet Apple's demand for iPhone outside of China if necessary. However, iPhone demand has increased dramatically since that statement was made. Recent reports amidst the coronavirus outbreak has revealed that Apple has increased its iPhone orders for the first half of 2020 by 10%. Furthermore, the US-China trade issue was a protracted, drawn-out issue. The coronavirus has exploded quickly onto the global stage, taking Apple and its manufacturers alike by surprise.

At the beginning of the week, Apple seemed clear, given its wider guidance for Q2 and its travel restrictions, that it could expect to encounter disruption to its operations over the coming weeks and maybe months. Since then, Apple has moved to shut down all of its operations in China until at least February 9 as the virus outbreak continues to spread. Analysts and onlookers have been saying for several days that disruption is likely. Yet the situation continues to escalate, the contrast in Apple's response to this crisis at the beginning of the week, compared to the measures it has taken at the end of the week are telling. We are only seeing the beginning of the effects of the coronavirus outbreak on Apple's operations. For the sake of the human lives involved, we should all hope for a swift resolution to the crisis. For Apple, however, it's likely that taking full stock of the coronavirus and its impact, and recovering from its effects, will take a good deal longer.

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