Apple has a huge problem with its supplier’s iPhone factory in China

Hong Kong
CNN business

A violent workers’ revolt at the world’s largest iPhone factory in central China further shakes Apple’s strained supply and highlights how the country’s strict zero-Covid policy is hurting global tech companies.

The troubles began last month when workers left the factory campus in Zhengzhou, capital of central Henan province, amid Covid fears. In the event of staff shortages, workers were offered bonuses for returning.

But protests erupted this week when the newly hired employees said management had not kept their promises. The workers, who clashed with security officers in hazmat suits, were eventually offered cash to quit and leave.

Analysts said troubles at Taiwanese contract manufacturing firm Foxconn, a top Apple supplier that owns the facility, will also accelerate the pace of diversification away from China and into countries like India.

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

“Each week of this shutdown and rioting costs Apple about $1 billion a week in lost iPhone sales, we estimate. Now, because of these brutal shutdowns in China, about 5% of iPhone 14 sales are likely off the table,” he said.

On November 23, security forces clashed with workers during a protest outside the factory of Apple supplier Foxconn in Zhengzhou, China.

Demand for iPhone 14 units during the Black Friday holiday weekend was much higher than supply and could lead to major shortages leading up to Christmas, Ives said, adding that the disruptions at Foxconn, which began in October, are a big “for Apple” Stomach blow” were this quarter.

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In a note on Friday, Ives said Black Friday store reviews show major iPhone shortages across the board.

“Based on our analysis, we believe the iPhone 14 Pro shortages have gotten much worse over the past week with very low inventories,” he wrote. “We believe that many Apple stores are now experiencing shortages of iPhone 14 Pro…up to 25% to 30% below normal towards a typical December.”

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

Earlier this month Apple said shipments of its latest range of iPhones would be “temporarily” affected by Covid restrictions in China. The Zhengzhou assembly plant, which normally employs around 200,000 workers, is “currently operating at significantly reduced capacity” due to Covid curbs.

The Zhengzhou campus has been grappling with a Covid outbreak since mid-October, sparking panic among its workers. Videos of people leaving Zhengzhou on foot went It went viral on Chinese social media in early November, forcing Foxconn to step up measures to get its employees back.

To lure workers, the company said it 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 vacancies.

But on Tuesday night, hundreds of workers, mostly new hires, began protesting the terms of the pay packages they were being offered and also their living conditions. The scenes became increasingly violent the next day as workers clashed with large numbers of security guards.

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By Wednesday evening, the crowds had Calm down, and protesters returned to their dormitories on the Foxconn campus after the company offered to pay the newly hired workers 10,000 yuan ($1,400), or about two months’ wages, to have them quit and leave the site altogether.

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

Even before this week’s demonstrations, Apple had started manufacturing the iPhone 14 in India to diversify its supply chain away from China.

The late September announcement marked a major shift in strategy and came at a time when US tech companies were looking for alternatives to China, the world’s decade-long factory.

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

Kuo said on Twitter he believes Foxconn would do so accelerates the expansion of iPhone production capacity in India as a result of the Zhengzhou lockdown and resulting protests.

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

— Chris Isidore contributed to this report.