The Foxconn/COVID Mess
Taiwan based Foxconn (2354.TT) is a massive employer in China with 12 factory complexes, the largest of which is located in Longhua Town in the city of Shenzhen, which has come to be named “Foxconn City” and covers 1.2 mi2 within its walls. Many workers live in the dormitories and walk to the 15 factories within the ‘city’, which has its own stores, restaurants, banks, and hospital, and while numbers vary considerably, the lowest worker count we have seen is ~200,000. Foxconn also has a similar ‘city’ in Zhengzhou, said to also employ ~200,000 workers, which is also known as “iPhone City”, as much of Apple’s (AAPL) iPhone line is assembled at the Zhengzhou complex.
Late last week the local government informed the management of the Zhengzhou complex that the city would be placed on lockdown due to an outbreak of COVID-19, limiting travel. This forces workers to stay ‘on campus’ in the dormitories, as the factories are allowed to continue production under a ‘closed loop’ system, meaning no one leaves the complex. As this was a situation that developed rapidly, it seems Foxconn was caught off guard and did not have the resources needed to feed and house the entire staff of workers. Under lockdown rules workers were not allowed to eat communally in the company cafeteria, and were forced to eat in the dorms, which caused conditions to be difficult early on.
There have been a number of news stories and videos about workers jumping over fences in order to leave the plants for fear of being caught in a COVID outbreak or unhappy about the poor living conditions, so Foxconn began to increase weekly bonuses to workers from ~$14/wk. to ~$55/wk., and for those that worked for more than 25 days, the bonus was increased from ~$205 to ~$685. Those that put in “full effort”, meaning remained on campus for the entire period, could earn a potential ~$2,054 bonus, against a typical worker salary of between $410 and $550/month.
Over the last two days there have been videos circulating social media saying that there have been 8 deaths at the Foxconn Zhangzhou plant during the lockdown, which Foxconn denies under the premise that the videos were ‘doctored’, but the real question is how much the issues at Foxconn will affect iPhone 14 family production. Recent estimates indicate that the plant’s output could be reduced by as much as 30%, due to staff shortages caused by workers leaving, but some of that shortfall can be transferred to the Shenzhen facility, which faced two closings this year in March and July but is currently not under lockdown.
Quick math based on historic Apple iPhone shipments would indicate that Apple would typically ship 85.97m iPhone units in the 4th calendar quarter, as each quarter this year has been up between 2.5% and 3.2% y/y. Taking the mid-point of that spread generates the 85.97m units for 4Q (cal.). As a check, 4Q shipments for the iPhone typically represent 36.5% of the full year’s shipments, and the number above would represent a slightly more conservative 35.6% of full year, so it is certainly within reason. As Foxconn assembles ~70% of iPhones, that would represent 60.17m units in 4Q, or 20.06m units/month. Assuming the lockdown lasts for one month and that Foxconn’s production rate is reduced by 30%, that would represent a shortfall of 14.04m units for the quarter, or 16.3% of 4Q (cal.) unit volume. Again this assumes a one month lockdown, a 30% volume reduction, and no shift to another Foxconn plant, all of which would likely be the worst case scenario.
We would expect that with the unusually large ‘incentive’ payments Foxconn is offering, the volume reduction will be less than 30%, and while the lockdown could last a month, we expect it will last 2 to 3 weeks, as the company and the city are testing virtually everybody on a regular basis. We expect Foxconn can offload ~10% of the ‘missed’ volume to the Shenzhen plant, and, in worst case, Apple could shift another 10% to other assemblers, bringing the shortfall to ~11.2m units spread across the globe. While this is still a substantial shortfall, iPhone buyers have faced order fulfillment delays before, with two weeks not being uncommon during periods of high demand. As Apple has been the only smartphone brand to see shipment growth last quarter, iPhone 14 family customers could see longer than usual delivery delays, but good logistics could shorten that time a bit by pulling inventory from slower sales regions. All in the worst case scenario for iPhone 14 shipments and delivery is likely less of an issue than the news stories seem to hint at, and even our quick calculations assume a positive y/y iPhone shipment number, which is certainly not a guarantee given the macro environment, so unless the lockdown is sustained or spreads to Shenzhen, we expect it will do little to hinder Apple sales for the 4th calendar quarter, and in worst case push some shipments into 1Q ‘23
Late last week the local government informed the management of the Zhengzhou complex that the city would be placed on lockdown due to an outbreak of COVID-19, limiting travel. This forces workers to stay ‘on campus’ in the dormitories, as the factories are allowed to continue production under a ‘closed loop’ system, meaning no one leaves the complex. As this was a situation that developed rapidly, it seems Foxconn was caught off guard and did not have the resources needed to feed and house the entire staff of workers. Under lockdown rules workers were not allowed to eat communally in the company cafeteria, and were forced to eat in the dorms, which caused conditions to be difficult early on.
There have been a number of news stories and videos about workers jumping over fences in order to leave the plants for fear of being caught in a COVID outbreak or unhappy about the poor living conditions, so Foxconn began to increase weekly bonuses to workers from ~$14/wk. to ~$55/wk., and for those that worked for more than 25 days, the bonus was increased from ~$205 to ~$685. Those that put in “full effort”, meaning remained on campus for the entire period, could earn a potential ~$2,054 bonus, against a typical worker salary of between $410 and $550/month.
Over the last two days there have been videos circulating social media saying that there have been 8 deaths at the Foxconn Zhangzhou plant during the lockdown, which Foxconn denies under the premise that the videos were ‘doctored’, but the real question is how much the issues at Foxconn will affect iPhone 14 family production. Recent estimates indicate that the plant’s output could be reduced by as much as 30%, due to staff shortages caused by workers leaving, but some of that shortfall can be transferred to the Shenzhen facility, which faced two closings this year in March and July but is currently not under lockdown.
Quick math based on historic Apple iPhone shipments would indicate that Apple would typically ship 85.97m iPhone units in the 4th calendar quarter, as each quarter this year has been up between 2.5% and 3.2% y/y. Taking the mid-point of that spread generates the 85.97m units for 4Q (cal.). As a check, 4Q shipments for the iPhone typically represent 36.5% of the full year’s shipments, and the number above would represent a slightly more conservative 35.6% of full year, so it is certainly within reason. As Foxconn assembles ~70% of iPhones, that would represent 60.17m units in 4Q, or 20.06m units/month. Assuming the lockdown lasts for one month and that Foxconn’s production rate is reduced by 30%, that would represent a shortfall of 14.04m units for the quarter, or 16.3% of 4Q (cal.) unit volume. Again this assumes a one month lockdown, a 30% volume reduction, and no shift to another Foxconn plant, all of which would likely be the worst case scenario.
We would expect that with the unusually large ‘incentive’ payments Foxconn is offering, the volume reduction will be less than 30%, and while the lockdown could last a month, we expect it will last 2 to 3 weeks, as the company and the city are testing virtually everybody on a regular basis. We expect Foxconn can offload ~10% of the ‘missed’ volume to the Shenzhen plant, and, in worst case, Apple could shift another 10% to other assemblers, bringing the shortfall to ~11.2m units spread across the globe. While this is still a substantial shortfall, iPhone buyers have faced order fulfillment delays before, with two weeks not being uncommon during periods of high demand. As Apple has been the only smartphone brand to see shipment growth last quarter, iPhone 14 family customers could see longer than usual delivery delays, but good logistics could shorten that time a bit by pulling inventory from slower sales regions. All in the worst case scenario for iPhone 14 shipments and delivery is likely less of an issue than the news stories seem to hint at, and even our quick calculations assume a positive y/y iPhone shipment number, which is certainly not a guarantee given the macro environment, so unless the lockdown is sustained or spreads to Shenzhen, we expect it will do little to hinder Apple sales for the 4th calendar quarter, and in worst case push some shipments into 1Q ‘23
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