iPhone SOS! Foxconn Seen Risking 20% Sales Drop in Worst-Case Covid Shutout

Morgan Stanley analysts have put a value on how much revenue is at risk for Foxconn Technology Group if its Zhengzhou operation is unable to ship any iPhones.

Foxconn, Apple’s key device assembly partner, has struggled to contain a Covid-19 outbreak at its facilities in Zhengzhou, China. (Bloomberg)

Morgan Stanley analysts have put a value on how much revenue is at risk for Foxconn Technology Group if its Zhengzhou operation is unable to ship any iPhones for the rest of the year as it battles a coronavirus outbreak.

Though deemed unlikely, the worst-case scenario for Foxconn's main listed unit, Hon Hai Precision Industry Co., would result in a 20% shortfall in expected sales for the current quarter, analysts led by Sharon Shih wrote in a research note Nov. 7. That would also entail a 36% drop in revenue from production of Apple Inc.'s iPhone.

Foxconn, the Taiwanese manufacturer best known for being Apple's key device assembly partner, has struggled to contain a Covid-19 outbreak at its facilities in Zhengzhou, which have been subjected to a weeklong lockdown by China's Covid Zero policy enforcers. Some of its 200,000 staff at the plant opted to leave before the lockdown while others have been pushed into strict quarantine and so-called closed-loop business operation.

The exodus of workers has disrupted output at the world's largest iPhone plant at a crucial time ahead of the holidays, and Foxconn has made preparations to bring backup production online and raise hourly wages by more than a third to attract more workers. The major threat to recovery now may be an extension of the lockdown, due to expire Nov. 9, or the imposition of other abrupt measures that may slow or halt assembly lines.

If Foxconn can get its production back on track and the Covid situation under control, sales will still take a hit in the first half of November but will recover from then on and into December, analysts at Citi wrote in a Nov. 6 note.

The Zhengzhou facilities are responsible for more than 85% of production capacity for the iPhone 14 Pro and Pro Max devices, according to Counterpoint senior analyst Ivan Lam. Those have been Apple's most in-demand handsets with this year's generation, though the Cupertino, California-based company said in a statement Sunday that it now expects lower shipments and delivery delays for those top-tier devices.

Hon Hai reported Monday that its October sales were up 41% compared to last year, but said it would be lowering its fourth-quarter forecast. The company is due to report its third-quarter results this Thursday.