Apple has no easy road out of China
Summary
Short supply of iPhone Pro models threatens near-term sales mix, but China unrest also highlights long-term risk.Apple Inc.’s short-term problems depend on the patience of its most lucrative iPhone buyers. Its long-term problems will require the patience of a much larger constituency.
Growing unrest in China has affected production of Apple’s devices there. The company warned on Nov. 6 that Covid restrictions at an assembly plant in Zhengzhou were resulting in significantly reduced capacity for producing its iPhone 14 Pro and Pro Max models. The situation has only grown worse since, as the lockdowns have helped spark more protests across the country to a level unseen in decades.
That threatens the sales mix that investors were counting on to help prop up iPhone revenue in the December quarter.
Apple has been selling Pro versions of each year’s iPhone family for the past three years, using enhancements such as a more powerful camera and premium materials to command a higher price point for Pro devices compared with each year’s mainline release. That gap is even greater this year as only the iPhone 14 Pro models got Apple’s latest in-house processor while the iPhone 14 and 14 Plus devices are using last year’s A15 chip. The iPhone 14 and 14 Plus models currently have little-to-no wait time on Apple’s online store, while delivery times for the two Pro designs are currently around Dec. 28.
Analysts largely say that most prospective buyers of the iPhone 14 Pro models will wait out the delays. Even that would likely push some iPhone revenue into the March quarter. But in a Nov. 23 report, Shannon Cross of Credit Suisse said, “We see increasing risk that demand will shift to iPhone 14/14 Plus for consumers that are in need of a new phone or wanting to purchase holiday gifts instead of IOUs."
Wall Street hasn’t yet factored in any significant shifts in product mix; the consensus estimate for iPhone revenue in the December quarter has edged down only 1% since before Apple issued its warning on Nov. 6, according to FactSet.
Apple’s share price fell 2.6% Monday, part of a broader market selloff sparked by worries of China’s unrest. The stock has outperformed its major tech peers with only an 18% drop year to date; the Nasdaq Composite Index has slid 29% in that time.
But growing unrest in China furthers the questions for Apple’s long-term direction beyond just near-term iPhone sales. Substantially all of the company’s products are manufactured in China. That reliance has grown more tenuous as tensions have risen between China and the U.S.
The unprecedented nature of the latest protests adds a new element of risk that is likely to hang over any foreign business operating in China, and Apple isn’t just any foreign business. It is the world’s most valuable company and is so large that it requires its own “city" just to build iPhones, shipments of which now exceed 230 million units every year. In a note earlier this month, Bank of America analyst Wamsi Mohan wrote that “meaningful diversification from China-based manufacturing is many years away" for Apple.
A reality distortion field sure would come in handy right now.
