Apple, iPhones, and China: Short-term problems need a long-term fix

Apple’s iPhone production problems in China add yet another chapter to the collapse of previous supply chain models, ongoing political tension and exposure to disaster; all have underlined the need to diversify across every aspect of manufacturing to become more resilient.

Crisis management is no dawdle

The impact of these challenges on Apple means the company has perhaps lost millions of iPhone sales in the current quarter. That’s a challenge, but Apple is by no means unique in relying on a supply and manufacturing ecosystem that has proved less resilient than we need in these changing times.

Yes, for Apple, rioting workers in China is not a good look, and the attempt to keep COVID-19 in check there has evidently failed, to the probable detriment of us all. Surely, the current conflation of crises shows that the future of manufacturing must be multi-site and international.

Building the future supply chain

That’s why I believe Apple, and I imagine every other firm, will develop plans to double, or even triple manufacturing hubs across their chains. That means Apple and TSMC may manufacture advanced processors at the new factory in Arizona while at the same time also making chips elsewhere. They’re going to want to multi-source strategic components — and hardware assembly — to provide a bulwark against any future disasters. Setting up this kind of resilience will take time, but Apple is on the fast track to putting this in place.

I also think the need to build such resilience may turn out to be one of the reasons we’re suddenly hearing that new products (Apple Car, Apple Glass) may not turn up until 2026 and late 2023, respectively, rather than earlier dates discussed before. Apple will want to take time not just to develop the products, complex as doing so may be, but also to develop these more resilient manufacturing and supply chains, not to mention building increasingly circular manufacturing capacity. (That Apple Car you drive after 2026 might contain more recycled raw materials than anything else on the road.)

Change doesn’t come cheap

All this activity will almost certainly translate into more expensive products. You can’t build a resilient, distributed, doubled-up system that’s as efficient as a less-resilient “just in time” system for the same price, which means production costs will increase.

It’s not just the need to reconfigure supply chains. Prices will also climb as a result of inflation, increasingly costly energy, raw material and logistical expenses and the need to boost wages to keep pace with inflation. But all of these are long-term problems at a time of transition when a range of events have taken place to test the strength of existing systems. The points of failure will be recognized and improved over time.

You need long-term solutions to fix these things

For now, analysts warn that iPhone 14 sales will be hit by an up to 20 million unit shortfall following problems at Apple partner Foxconn’s iPhone production plant. These challenges emerged in response, we’re told, to China’s COVID-zero policies, which may now have been relaxed slightly. All the same, for the current quarter, the damage is done.

Morgan Stanley analyst Erik Woodring in a note to clients offered insights into the scale of the damage. He’s cut iPhone estimates by 11%, but maintained his estimates for the next quarter at 56.5 million units. He argues (unlike analyst Ming Chi Kuo) that most sales will be deferred into the next quarter, but now pegs shipments for the current quarter at aboutv75.5 million.

The analyst stresses that this is quite a conservative model, given that the firm’s Greater China Hardware team estimates just 1-2 million lost iPhone sales. All the same, he warns that Apple’s December revenue may come in 3% under consensus at roughly $120.3 billion.

Should Apple worry?

In the short term, we know the company is concerned because it issued a rare warning to investors once it realized how shaky things had become. At the same time, it is also experiencing relatively strong demand across all its hardware products while most competitors are seeing declines. This effectively signals that the company has the luxury of a loyal customer base and demand, and it’s going to be that which Apple leans into as it moves forward.

Apple management has consistently explained this approach over the years. Sure, it may become a little more disciplined in recruitment, but it will continue to invest in R&D and try to sail the ocean of change toward whatever new product paradigms become relevant to the post-crisis age.

It’s what the company has always done, and as almost every enterprise finds itself forced to navigate increasingly complex headwinds, Apple will show how to implement necessary business change. Others will eventually follow.

Why? Because they usually do.

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