Apple has a huge problem at Foxconn’s iPhone factory in China

Hong Kong
CNN Business

A furious workers’ riot at the world’s biggest iPhone factory this week in central China further roiled Apple’s strained supply chain and underscored how the country’s strict zero-Covid policy is hurting global tech firms.

Trouble began last month when workers walked out of the factory campus in Zhengzhou, the capital of central Henan province, over Covid fears. Short of staff, workers were offered return bonuses.

But protests erupted this week when newly appointed staff said management had failed to keep its promises. The workers who confronted the security officers wearing hazmat suits were eventually offered cash to leave and leave.

Analysts said the problems faced by Taiwanese contract manufacturing firm Foxconn, a leading supplier to Apple, which owns the facility, will also accelerate the pace of diversification from China to countries such as India.

Daniel Ives, managing director of equity research at Wedbush Securities, told CNN Business that the ongoing shutdown of production at Foxconn’s sprawling campus in the central Chinese city of Zhengzhou is an “albatross” for Apple.

“Each week of this shutdown and disruption, we estimate, is costing Apple approximately $1 billion per week in lost iPhone sales.” Now, approximately 5% of iPhone 14 sales are likely lost because of these brutal shutdowns in China,” he said.

Demand for iPhone 14 devices during the Black Friday holiday weekend was far higher than supply and could have caused a major shortage leading up to Christmas, Ives said, adding that the Foxconn outages that began in October had been a serious “ blow’ for Apple this quarter.

In a note Friday, Ives said checks of Black Friday stores showed heavy iPhone shortages across the board.

“Based on our analysis, we believe the iPhone 14 Pro shortage has gotten much worse over the past week with very low inventory,” he wrote. “We believe many Apple stores are now short of iPhone 14 Pro … up to 25%-30% below normal for a typical December.”

Ming-Chi Kuo, analyst at TF International Securities, wrote on Twitter that more than 10% of the world’s iPhone production capacity was affected by the situation at the Zhengzhou campus.

Earlier this month, Apple said shipments of its latest iPhone range would be “temporarily affected” by the Covid restrictions in China. It said its assembly facility in Zhengzhou, which normally houses about 200,000 workers, “is currently operating at significantly reduced capacity” due to Covid restrictions.

The Zhengzhou campus has been battling a Covid outbreak since mid-October, which has caused panic among workers. Videos have surfaced of people leaving Junjo on foot went viral on Chinese social media in early November, forcing Foxconn to step up measures to bring back its staff.

To lure workers, the company said it had quadrupled daily bonuses for workers at the plant this month. A week ago, state media reported that 100,000 people had been successfully recruited to fill the vacant positions.

But on Tuesday evening, hundreds of workers, mostly new hires, began to protest the terms of their pay packages and also their living conditions. The scenes turned increasingly violent the next day as the workers clashed with large numbers of security forces.

By Wednesday evening, the crowds had thinned subsided, with protesters returning to their dormitories on Foxconn’s campus after the company offered to pay newly hired workers 10,000 yuan ($1,400), or roughly two months’ wages, to leave and leave the site altogether.

In a statement sent to CNN Business on Thursday after the protests ended, Apple said it had a team in place on site at the Zhengzhou facility, working closely with Foxconn to ensure employee concerns are addressed.

Even before this week’s demonstrations, Apple began making the iPhone 14 in India as it sought to diversify its supply chain away from China.

The announcement in late September marked a major shift in strategy and came at a time when American technology companies are looking for alternatives to China, the world’s factory for decades.

The Wall Street Journal reported earlier this year that the company was looking to increase production in countries such as Vietnam and India, citing China’s strict anti-Covid policies as one of the reasons.

Kuo said on Twitter that he believes Foxconn will accelerate expansion of iPhone production capacity in India as a result of the Zhengzhou blockade and resulting protests.

Foxconn’s iPhone production in India will grow by at least 150% in 2023 compared to 2022, he predicted, and the long-term goal would be to source between 40% and 45% of those phones from India, in compared to less than 4% now.

— Chris Isidore contributed to this report.

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