Tech stocks tumble as Apple admits coronavirus will affect iPhone production volumes

Apple has taken the unprecedented step of warning that its recently published quarterly results are no longer accurate because the outbreak of coronavirus in its Chinese production centres will negatively affect worldwide iPhone supply, and Chinese product demand has fallen.

The news has already seen falls in technology stocks trading, not only at Apple but also at firms that have significant industrial production bases in the affected area of China.

In its first-quarter 2020 results, Apple reported iPhone revenue of $56bn, up 8% year on year, and said its wearables, home and accessories products had set a new all-time record with revenue of $10bn, up 37% year on year.

“We are thrilled to report Apple’s highest quarterly revenue ever, fuelled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for services and wearables,” said Apple CEO Tim Cook at the results publication on 28 January.

But on the analysts’ calls for the results, Cook added that given that Apple manufactures many of its products in China, it was keeping a close watch on the coronavirus, because COVID-19 had the potential to directly affect Apple’s ability to build its products, and to sell them to consumers in China.

Now, following the end of the extended Chinese New Year holiday on 10 February, the company said it was experiencing a slower return to normal conditions than it had anticipated and, as a result, it did not expect to meet the revenue guidance previously provided for the March quarter because of two main factors.

Primarily, it said, although its iPhone manufacturing partner sites were located outside the Hubei province, where the outbreak began, and although all its facilities had now reopened, the factories were ramping up more slowly than Apple had anticipated. The result was that iPhone supply shortages would “temporarily” affect revenues worldwide, said the company.

The second factor, said Apple, was that demand for its products within China has been affected by the events, with all official Apple stores, and those of its designated partners, closed. Other stores selling its products that are still open have been operating at reduced hours and were seeing what Apple admitted was very low customer traffic. However, outside China, customer demand across Apple’s product and service categories had been strong and in line with expectations, it added.

Apple said in a statement: “As the public health response to COVID-19 continues, our thoughts remain with the communities and individuals most deeply affected by the disease, and with those working around the clock to contain its spread and to treat the ill. The health and wellbeing of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues.

“We are gradually reopening our retail stores and will continue to do so as steadily and safely as we can. Our corporate offices and contact centres in China are open, and our online stores have remained open throughout.”

In a bid to reassure the industry and investor community, Apple said it was fundamentally strong, and the disruption to its business was only temporary. The company said the situation was evolving, and it would provide more information during its next earnings call in April.

However, assessing the situation in China and beyond, regional technology analyst TrendForce said the coronavirus outbreak had had a relatively high impact on the smartphone industry because of the highly labour-intensive nature of the product’s supply chain. It projected that in the first quarter of 2020, smartphone production would decline by 12% year on year, making it the lowest quarterly output over the past five years.

TrendForce added that if the outbreak was not contained by the end of February, parts of the upstream supply chain, including passive components and camera modules, would also show shortages, potentially hitting smartphone production.

The analyst now predicts that 2020 smartphone production will reach 1.381 billion units, a 1.3% decline year on year and the lowest output since 2016. But it warned that it was entirely possible for 2020 smartphone production to fall below this forecast level.