This will become an often-played tune over the next few months, delineating how dependent Corporate America has become on China.
China’s official reaction to the coronavirus – locking down mega-cities, shutting down part of the transportation system, closing factories and retail stores for weeks, etc. – largely shut down production and crushed retail sales. And this predictably would do two things to Corporate America:
- Throw its complex and huge supply chains that crisscross China into disarray,
- And cause sales in China of US brands – mostly made in China – to collapse.
There have already been some US companies that grappled publicly with warnings about revenues, earnings, and supply chain woes. But here is the big one.
Apple announced this afternoon – a holiday for US markets and the last day of a long weekend, when no one is paying attention – that it threw its revenue guidance of January 28 out the window. Clearly, January 28 was not the time to sow doubt; the stock had to be driven higher.
At the time, the coronavirus and China’s way of dealing with it were already in full swing, and the supply chain woes and retail sales collapse were already obvious. In my podcast of February 2 – THE WOLF STREET REPORT: What Will the Coronavirus Do to the US & Chinese Economy? – I pointed at these issues; and surely, Apple had been aware of them too for days, as part of its supply chain and retail stores in China had already been shut down.
Apple disclosed today that, as work is starting to resume at factories in China, “we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors.”
Those two factors are of course the supply chain woes and collapsed retail sales in China.
The supply chain woes will cause “iPhone supply shortages” and eat into revenues.
The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province — and while all of these facilities have reopened — they are ramping up more slowly than we had anticipated. The health and well-being 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. These iPhone supply shortages will temporarily affect revenues worldwide.
Apple’s China sales collapsed as many stores were shuttered and as traffic plunged at stores that were open.
The second is that demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed. Additionally, stores that are open have been operating at reduced hours and with very low customer traffic. 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 centers in China are open, and our online stores have remained open throughout.
“The situation is evolving,” Apple added to make clear that this was just the first belated announcement, and that the second belated announcement would come during the earnings call in April, when it will sort out in greater detail its supply chain woes and sales collapse in China. And it added the soothing words that “this disruption to our business is only temporary.”
We’ve been sitting on the edge of our collective chair for weeks, waiting for this type of announcement from Apple. Other giants among Corporate America will soon come out with their own version of throwing their revenue guidance out the window, warning of supply-chain woes and shortages of components and products, and predicting more uncertainty as the “situation is evolving.”
The situation will be evolving for months. This issue in China isn’t going to be resolved by the end of the first quarter. As Apple and others – including automakers – have now pointed out: Just because the factory is open, doesn’t mean it has the people and the components and supplies in place to start producing at a normal rate.
All supply chains going through China, or relying on China for some of their components, have been thrown into disarray. Not much is moving through. If just one part of the final product can’t make it to the factory, the final product can’t be shipped.
Supply chains are complex and finely tuned. For some easy-to-make products, such as shoes, there are alternatives around the globe. But for precision-machined components and high-tech components, as in the automotive and consumer electronics sectors, it takes time to develop supply-chain alternatives outside China or to sort through the supply-chain woes in China.
Over the next few weeks, this will become an oft-played tune that will delineate just how dependent Corporate America has become on China, both, in terms of revenues, and in terms of production.