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Apple's Coronavirus Woes Might Not Ease Until Second Quarter

By Evan Niu, CFA - Mar 2, 2020 at 1:24PM

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iPhone camera lenses are reportedly in short supply.

Fears surrounding the coronavirus outbreak tanked global markets last week, as more companies started to formally warn investors about the financial toll the epidemic could take. That's especially true for tech multinationals that have supply chains concentrated in China and surrounding countries. Apple (AAPL 2.45%) was among the first to say it would miss its guidance due to the outbreak, after it had already issued a revenue forecast that factored in a wider range than usual due to the uncertainty.

Things might not get better for at least another couple months.

Green iPhone 11 Pro

iPhone camera lenses are reportedly suffering from shortages due to the outbreak. Image source: Apple.

The weakest link

Credible Apple analyst Ming-Chi Kuo of TF International Securities has put out a research note (as reported by MacRumors) suggesting that iPhone production will remain constrained until the second quarter. There has been a shortage in iPhone camera lens shipments from supplier Genius Electronic Optical, according to the report. Kuo estimates that the supplier has roughly a month's worth of inventory but production won't ramp back up until May -- two months from now.

Generally speaking, supply chains are only as resilient as the weakest link, since products can't be manufactured if even a single critical component is missing or suffering from shortages. Apple attempts to mitigate this risk by having multiple sources wherever possible, but the outbreak's impact is so widespread across China that even the most diversified supply chains are being hurt. The growth in the number of new coronavirus cases in China is slowing, which is an encouraging sign, but the infections in surrounding countries in Asia are rising.

Samsung and LG Innotek both closed factories in South Korea over the weekend after a worker tested positive for the disease, according to Reuters. Both are prominent Apple suppliers. It's unclear if Samsung's disruption will impact Apple since Samsung is such a massive electronics conglomerate, but LG Innotek provides iPhone camera modules. The work stoppages are expected to be just a couple days, with the facilities scheduled to reopen on Tuesday.

iPhone supply is starting to get pinched, with the tech giant quoting minor shipping delays for online orders for certain models. Architecting a lean inventory management system is one of CEO Tim Cook's greatest accomplishments from his days as COO -- Cook famously said that inventory is "fundamentally evil" -- but the flip side is that the company may miss out on sales during supply chain disruptions if it struggles to replenish that inventory to meet demand.

At Apple's annual shareholder meeting last month, Cook reiterated that the epidemic was "a fairly dynamic situation" that was presenting "a challenge," without providing new details. The chief executive had previously discussed the coronavirus impacts at length on the January earnings call.

"The first [main factor for missing guidance] is that worldwide iPhone supply will be temporarily constrained," Apple said last month. "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."

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