As the impact of the coronavirus spreads, Apple issued a rare statement yesterday related to the coronavirus’ impact on its quarterly earnings guidance and that announcement is now reverberating throughout the tech industry as well. The company reported that its current quarter’s earnings will likely be negatively affected by several factors related to the virus, specifically its effect on the Chinese market and its global supply chain.
What makes the news even more disconcerting is that the company had already suggested on its last earnings call just a few weeks back that revenues for the quarter could fall into a much wider range of potential outcomes than they typically provide because of the uncertainties the virus was creating. A second negative statement just a few weeks later highlights that the impact of the virus is proving to be much worse than originally thought. The fact that they didn’t say how much the earnings guidance decline would be also emphasizes the uncertainty about the total extent of the virus’ impact.
Specifically, Apple said that sales of iPhones in China—an increasingly important market for the company—will be lower than it had predicted because many of its retail stores and other retail partners’ stores have been closed as a result of the virus. In addition, as stores reopen, the traffic in them has been significantly lighter than normal, leading to the slowdown in sales. Theoretically, online sales shouldn’t be impacted as strongly, but it’s not hard to imagine that the delivery mechanisms in China have also been slowed by the virus.
The second factor Apple cited—a slower ramp to full production after Chinese New Year—is potentially more troublesome, because it impacts the company’s entire global supply of iPhones and other devices. In addition, it certainly implies that other major tech hardware vendors could start feeling this soon as well.
As most people know, the vast majority of Apple’s devices are built in Chinese factories, so the company—like most every other hardware tech vendor—is currently very reliant on these Chinese factories cranking out products in huge quantities on a steady basis. And that’s really the problem, because if Apple is starting to notice the impact strongly enough that it felt the need to issue a statement on revised guidance, then we’re likely going to see a lot of other hardware-focused tech vendors do something similar over the next few days or weeks. In fact, even before Apple, Nintendo had disclosed that it won’t be able to build as many of its Switch gaming consoles as it would like, because its primary production partner Foxconn—who also happens to be Apple’s largest factory partner—was facing delays at its Chinese factories.
The other thing to bear in mind is that even companies that don’t have factories in the most affected areas of China can see their production slowed because of their dependence on certain parts or other components that do come from the most impacted regions. These days, the number of subcomponents that go into more sophisticated tech devices can easily reach over 100, and because so many of these subcomponents are built in China, the range of impact from the virus is potentially much wider than it first appears.
By the way, the timing here is also very important. One thing that many people don’t understand is that, as terrible as it is, the coronavirus started seriously impacting Chinese factories just before the one week in the year when they’re scheduled to be offline: Chinese New Year. If the virus had hit at another time of year, the impact could have been much worse. Now companies are trying to determine how many workers are returning to the factories after their scheduled break, and it’s those metrics that are going to be the most closely watched over the next few weeks.
In addition, out of an abundance of caution, I’ve also heard some hardware vendors say that the Chinese government is imposing mandatory factory shutdowns of 30 days if a single worker is discovered to be infected. Needless to say, that’s going to force companies to be very conservative about letting employees come back to work, which could also result in serious delays in production.
Ultimately, however, it’s essential to remember that this issue is an extremely challenging humanitarian crisis and that companies need to be (and, likely will be) sensitive to the issue and do whatever they can to keep their workers safe. Taking the big picture view, these production delays will likely (and hopefully) be little more than a blip on the long-term radar of tech industry production. Unfortunately, because many institutional investors are more concerned with short-term financial performance, this may cause some short-term challenges for those companies who are being impacted. Long-term, let’s hope the tech industry can learn from this crisis and figure out ways to both protect the workers who help bring products to life and to create supply chains that can withstand the inevitable challenges that lie ahead.