Apple jars investors into coronavirus realities

[HONG KONG] Apple could finally make investors as concerned as the wider population about the latest novel coronavirus. The iPhone maker warned on Monday that quarterly revenue would fall short of the US$63 billion to US$67 billion guidance it provided a few weeks ago because of supply and demand problems in China. The ripple effects from the outbreak may now become more apparent.

Apple's brick-and-mortar stores in China remain closed. Third-party vendors and online sales haven't provided a sufficient cushion. The tech titan said while its manufacturing partners have no factories in Hubei province, the epicentre of the virus, operations elsewhere in the country were "ramping up more slowly than we had anticipated".

This sort of double whammy may affect Apple more than many companies. Chinese customers account for nearly a fifth of revenue and essentially all iPhones are assembled there by partner Foxconn, which has slowly started reopening plants. With many workers trapped at home, however, staffing them is proving difficult. Interdependencies between component makers mean one small missing piece or stalled factory can grind the whole production system to a halt.

Everything from vitamins to cars depends on materials and parts from China, which remains a dominant producer of intermediate components. This widget economy may not be sexy, but it is essential. Nintendo, which already moved its Switch console manufacturing out of China, recently said it couldn't produce as many of them as it wants because of Chinese factory shutdowns.

More worrisome than video games are pharmaceuticals. China is the biggest producer of many drugs, and the sole provider of chemicals needed to make them. Four out of five US antibiotics come from the People's Republic, US Food and Drug Administration chief Scott Gottlieb recently told Congress. And many of the biggest Chinese chemical companies that supply drugmakers are headquartered in Wuhan, where the virus first struck.

Despite a litany of corporate cautionary notes, the S&P 500 has traded nearly 5 per cent higher this year. Chinese benchmark indices also have bounced back since the initial shock of the virus news. Following Apple's announcement, which came amidst a US holiday market closure, Australia's technology index dipped 3 per cent. That's the first sign that maybe a US$1.4 trillion company will sound the necessary alarm.

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Apple said on Feb 17 it would not meet the quarterly revenue guidance it provided on Jan 28 because of the coronavirus outbreak slowing iPhone production and weakening demand in China. The company added that customer demand outside of China remained in line with expectations.

REUTERS