Apple has warned disruption from coronavirus is starting to weigh on sales. Photo / AP
Apple has warned disruption from coronavirus is starting to weigh on sales. Photo / AP
Fears that global technology firms have become too reliant on China were reignited this week as Apple warned disruption from coronavirus was starting to weigh on sales.
In a memo to investors, it said the supply of iPhones would also be hit as production was ramping up more slowly than it had expected following the extended shutdown of factories.
This is the second time in just over a year that Apple has had to adjust its outlook due to sudden changes in China. Before the epidemic, China was rocked by trade tensions and tariff warnings, and was embroiled in a row over spying technology. Yet it remains the so-called "world's factory".
Figures suggest smartphone production could hit a five-year low in the first quarter of 2020, down 12 per cent, due to the epidemic. Photo / AP
"I think it would almost be an impossibility to change in the next few years," says Wedbush's Dan Ives. The technology sector is embedded throughout the country, he says, and the "exposure here is clear".
Estimates say China accounts for up to a third of global markets for technology goods.
In December, Apple is believed to have shipped 3.2 million iPhones to China, up 19 per cent on the year. In 2019, more than 360m smartphones were shipped there in all, a bright spot for demand in a stagnating market.
However, as the coronavirus outbreak has worsened, consumers in China have begun delaying spending on electronics, focusing instead on buying items such as medical supplies.
Sales are expected to take a further hit as shops are shut to try to contain the virus. Major tech brands such as Apple are "feeling the impact of store closures," says CCS Insight analyst Marina Koytcheva.
How this will pan out in the next few years is anyone's guess, she adds.
This is the second time in just over a year that Apple has had to adjust its outlook due to sudden changes in China. Photo / AP
"The reality is, nobody knows what exactly the effect of the coronavirus outbreak will be."
Perhaps more significant, is how embedded China is within technology supply chains.
Around 80 per cent of global assembly capacity is in China, with firms attracted by skilled and relatively cheap labour. Yet recently many of its facilities have come to a standstill.
Figures from TrendForce suggest smartphone production could hit a five-year low in the first quarter of 2020, down 12 per cent, due to the epidemic.
The analyst firm expects smartwatch production to be 16 per cent below forecasts, and smart speakers 12 per cent lower.
Many companies, including Apple, are said to have taken steps to protect their supply chains from wider impacts, setting up facilities in different regions of China.
"The way they thought about these things was around natural disasters," says Dan Wang, at Gavekal Research. They did not think about "wider geographical distances" outside the country.
Samsung makes half of its smartphones in Vietnam, giving it less exposure to turmoil at factories in China. Photo / AP
There are exceptions — Samsung makes half of its smartphones in Vietnam, giving it less exposure to turmoil at factories in China. However, even then many of the components going to Vietnam are sourced from China.
The integral nature of China to much of the production of electronic devices is something to which businesses are starting to awaken.
Last year, amid trade tensions between the United States and China and talk of increased tariffs, Apple was reportedly asking suppliers to look into moving some production out of China.
A shift has already started taking place, "accelerating in the last year and a half", Wang says. "Many companies have started to ask these questions."
China may be known as the world's factory, but executives are starting to ask: what happens when that factory shuts up shop?
