Wednesday, November 30, 2022

Foxconn/Apple: dire effects of zero-Covid policy will widen

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Newscasts showing Chinese workers scaling fences to escape the world’s biggest iPhone factory have proved to be a leading business indicator. Apple has warned that shipments of its latest smartphone models will undershoot forecasts.

The difficulties facing Apple and its contractor manufacturer Foxconn are just the start of industrial ill-effects from China’s drastic zero-Covid policy.

Chaos has reigned inside a Zhengzhou plant run by main supplier Hon Hai — the name under which Foxconn is listed in Taiwan. Employees fled harsh living conditions. Some reportedly walked 25 miles to get away from the campus where 200,000 of them live and work.

Global shipments of the high-end iPhone 14 Pro and iPhone 14 Pro Max will be delayed. Analysts had not accounted fully for this in their forecasts. They already expected iPhone production to fall as much as 30 per cent last month at the Foxconn plant due to lockdowns.

Now, even when lockdowns ease, a lack of workers could mean prolonged disruption.

Foxconn, which accounts for 70 per cent of global iPhone shipments, has increased the bonuses for employees that work without taking any leave for the month by a maximum of 10 times the previous figure. It has offered as much as a 75 per cent increase on base salaries.

That will be unsustainable for a business with razor-thin operating margins — less than 2.5 per cent last year.

The fourth quarter is a crucial period for sales. Apple will receive a smaller boost than typically follows the launch of new models — this year from the iPhones 14 series.

It is not just Apple and Foxconn that will suffer. All China-based manufacturers and their customers are exposed. China’s exports and imports unexpectedly fell in October, the first such decline since 2020. Exports dropped 0.3 per cent, significantly missing market expectations of a 4.3 per cent increase.

Beijing’s tough line on containing coronavirus is unlikely to soften to accommodate businesses in the US and Europe with which it is at loggerheads. The economic damage can only worsen.

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