Apple has warned that disruption in China from the coronavirus will cause its revenues to fall short in the current quarter, marking the second time in little over a year that weakness in China has forced the world’s most valuable technology company to issue a financial alert.
The US consumer tech company said that it had assumed that work would return to normal in China after the new year holiday that ended on February 10. Instead, it said it was “experiencing a slower return to normal conditions than we had anticipated”, leading it to warn that it will not meet the revenue guidance issued at the end of last month.
Apple’s warning will send waves across Wall Street, which had already started to look past the continuing coronavirus crisis. Following its earnings report at the end of January, Apple’s shares have traded close to their all-time highs, valuing the company at more than $1.4tn as of Friday’s close.
The shortfall partly reflects a manufacturing slowdown that will mean that “worldwide iPhone supply will be temporarily constrained,” the company said.
None of the manufacturing plants run by its suppliers in China are in Hubei province, the centre of the viral outbreak. However, Apple said that other facilities, though reopened, were “ramping up more slowly than we had anticipated.”
It also said that store closures inside China had hit sales there, and that stores that were open were operating “at reduced hours and with very low customer traffic.”
The company said on Thursday that it would be reopening its five stores in Beijing by the end of last week, but they would be open for seven hours a day rather than the usual 12.
One person familiar with Apple’s manufacturing plans said that staff who had been given the job of overseeing production of the next iPhone, due out later this year, had been delayed by more than two weeks from returning to China.
But the disruption inside China has made it hard for workers at all levels to get back to work, another person said.
Even plants that are up and running in China have been constrained by staffing problems, with many workers still staying at home following the Lunar New Year holiday on January 25.
The manufacturing problems will shine a spotlight on vulnerabilities in the tightly co-ordinated network of suppliers that Apple has built to support the iPhone. Its just-in-time supply chain, which relies on hundreds of different component suppliers and manufacturers all over the world, is “enormously fragile”, the person familiar with its manufacturing said. “They have it so finely tuned that a glitch like this is a black swan. It has caught them completely off guard.”
Apple’s revenue guidance for the quarter, issued in late January, had already been set to take into account a potential hit from the coronavirus. The company said at the time that the wide range in its forecast — with revenue growing by anything from 9 to 15 per cent — reflected uncertainty about the spread of the virus.
The company did not issue revised guidance on Monday, or predict when production operations and retail stores would get back to normal.
But it suggested that things would return to business as usual soon, saying that the iPhone supply shortages would “temporarily affect revenues worldwide”.
It added: “Apple is fundamentally strong, and this disruption to our business is only temporary.”
On Monday afternoon, the company’s website in the US was showing all of the latest iPhone 11 models as being available, suggesting that the problems had not yet started to hit availability in its biggest market. But its AirPods Pro were showing a four-week delay for delivery to the US.
If the ramp-up in Apple’s supply chain stalls or the temporary disruption proves longer lasting, it could weigh on the iPhone at an important moment.
The company is reported to be planning to launch a new, cheaper handset within weeks, potentially widening its appeal and bringing in a bigger audience for new services such as Apple TV+. It is also gearing up for an important new iPhone cycle later in the year, something that had already pushed share prices higher in anticipation.
Apple’s business has proved resilient before in the face of a sharp slowdown in demand in China, though it has not experienced the magnitude of supply disruptions it is now facing.
It began 2019 with its first profit warning in 16 years because of weak sales there. Its revenue from the country dropped 12 per cent in its last fiscal year, to $44bn, pushing overall revenue down by 5 per cent.
But its shares had jumped by 120 per cent since the warning as Wall Street warmed to new service offerings and looked ahead to the next iPhone product launch.