Apple's factories are running, but suppliers wary about iPhone demand

Apple’s orders for the quarter ending in March are likely to drop 18% compared to the previous year

(Reuters) - As China reopens its economy after months of lockdown, Apple Inc’s (AAPL.O) iPhone factories are largely up and running. But with the coronavirus pandemic spreading across the world, the urgent question for the company is how many buyers there will be both for current models and the new slate of phones expected in the fall.

A senior official at one of Apple’s major contract assemblers said Apple’s orders for the quarter ending in March are likely to drop 18% compared with the previous year. The production ramp-up for new phones that work with next-generation 5G networks has been postponed, this person said, though it is still possible the 5G phones could launch as scheduled in the fall.

“No one is talking about manpower or material shortage (in China) anymore. Now everyone is looking at whether demand from U.S. and Europe could keep up,” said the person, who has direct knowledge of the matter. “The focus now is the demand from consumers in the U.S. and Europe.”

One of Apple’s key display suppliers is preparing for a similar level of contraction, according to a person familiar the matter. The company had anticipated shipping 70 million iPhone displays this year, but is now considering lowering that target by more than 17% to 58 million units.

The company is also planning to reduce the workforce at its Apple-designated production lines in its Vietnam factory, where displays are assembled before heading to China to be put into phones, this person said.

Apple declined to comment for this story.

Earlier this month, the company closed retail stores around the world even as it began to reopen outlets in China. With much of Europe and the United States on lockdown and unemployment soaring globally, there is little clarity on when demand might return.

The company could also yet face further supply chain problems as countries including Malaysia and Vietnam impose new restrictions to combat the coronavirus.

“Things are changing on a day by day basis due to supply chain disruptions, so it is difficult to craft any meaningful comment at the moment about both supply and demand,” said an official at one supplier in Malaysia.

FOGGY DEMAND OUTLOOK In February, Apple retracted its sales forecast for the quarter ended in March without giving a new one. Shares have dropped more than 15% since the start of the year.

“Our base case scenario assumes a shock to June quarter demand with steadily improving results” in the second half of the year rather than a “V-shaped” recovery, Canaccord Genuity analyst Michael Walkley wrote in a note to investors on March 18.

Taipei-based technology analyst Arthur Liao of Fubon Research cut iPhone shipment forecasts for this year’s first quarter to 35 million units, down 17% from 41 million units a year ago. The firm lowered total iPhone shipment forecasts for 2020 to 198 million, down from an earlier forecast of 204 million.

In the United States, at least, consumers themselves seem uncertain whether they will resume spending. In a survey of more than 2,600 U.S. adults by Civis Analytics conducted March 18-20, more than half of respondents said they planned to spend about the same on consumer electronics as before the virus outbreak if the situation is contained in the coming weeks.

But if the situation worsens, the respondents were evenly split, with roughly one-third each saying they would spend less, the same or more on consumer electronics when conditions returned to normal.

Such ambiguity has made it hard for Apple suppliers to gauge how 2020 will play out.

One maker of a sensor for the iPhone said the company continues to produce and ship parts for Apple devices and that this year’s first quarter ending in March was better than last year, with the second quarter also likely be higher volume than the year before.

“We were given a forecast for this quarter before the pandemic, about a month ago,” a person familiar with the situation at the sensor supplier said last week. “And now we are still producing as per the forecast given to us.”