Apple’s Supply Chain Is At Risk From The Coronavirus

Following on from my column yesterday, I have been attempting to divine the impact on global supply chains from the coronavirus outbreak in China.  Travel services have completely ground to a halt as the Lunar New Year Golden Week holiday has been effectively cancelled this year, and the usual bounceback that is seen in the week following the holiday is not going to occur.  Shanghai has extended the holiday one additional week—so it will now end February 9th—and I would expect that to be the norm around China. 

What about the supply chain, though?  As key Apple supplier Foxconn noted in a statement Tuesday: 

We do not comment on our specific production practices, but we can confirm that we have measures in place to ensure that we can continue to meet all global manufacturing obligations

As an investor that statement tells me nothing.  But, on Apple’s conference call the investing public had the chance to hear from the person I believe to be more responsible than any other employee for the creation of Apple’s China-to-U.S. sourcing juggernaut:  Apple CEO Tim Cook. Cook joined Apple in 1998 from Compaq, where he ran that company’s global sourcing, and rose to prominence at Apple—being named COO in October 2005 and CEO in August 2011—based on his success at streamlining the Cupertino company’s sourcing.  

Steve Jobs had the overarching vision, and leaders like Eddy Cue and Jonny Ive, are given credit for Apple’s product design and utility, but it was Cook who built the modern Apple, Inc. into a far different beast than its predecessor, Apple Computer.  

At some point along the way, though, the executive formerly known as Tim Cook became—as our president referred to him—Tim Apple, and those years of supply chain knowledge have been dropped in favor of corporate doublespeak.  His answer to the question posed by Shannon Cross of Cross Research on Apple’s conference call last night was a classic CEO bob-and-weave.

In terms of the coronavirus. As I had mentioned earlier, first and foremost, our thoughts with all of those that are affected across the region and as I had mentioned, we’re donating to groups that are working to contain the outbreak. We’re also working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations as of last week. The situation is emerging, and we’re still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider-than-usual revenue range for the second quarter due to the greater uncertainty.

I’ll talk about supply chain and customer demand some — to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, they are our alternate sources. And we’re obviously working on mitigation plans to make up any expected production loss. We factored best thinking in the guidance that we provided you. With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February, 10 depending upon the supplier location, and we’ve attempted to account for this delayed start-up through our larger range of outcomes that, that Luca mentioned earlier.

With respect to customer demand and sales, we’ve currently closed one of our retail stores and a number of channel partners have also closed their storefronts. Many of the stores that remain open have also reduced operating hours. We’re taking additional precautions and frequently deep cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area across the country in the last few days. And again, we have attempted to account for this in our guidance range that we’ve provided you. I hope that gets you some color.

It is very difficult to translate that into plain English, but I will try:  we don’t know.  

I do believe Apple has the redundancy in its supply chain—as Cook alluded to—to handle a short-term disruption, but not one that lasts, as some have posited into March or April.  In terms of customer demand Cook was implying there will be a significant hit to the region—Apple refers to it as Greater China—that drove the company’s earnings surprise in the December quarter.  How much of one? That’s impossible to know, since the vast majority of Apple purchases are done on the spot, whether that be in Beijing or Burbank.  

So, there’s a level of uncertainty in Apple’s guidance that is much more pronounced than the revenue guidance range of $63 to $67 billion (+8.5% – 15.5%) and a level of uncertainty that is certainly not reflected in the recent price jump in Apple shares.   

Crisis like the coronavirus tend to expose the worst CEOs, but even the best ones—and I would certainly put Tim Cook in that category—don’t have crystal balls.