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With coronavirus affecting the lives of human being, its impact is felt on the businesses around the globe as well. A similar roil is witnessed in world’s top tech company, Apple Inc.
On 17 February 2020, the Company notified the market regarding the uncertainty to meet its second quarter guidance for the period ending 31 March 2020. As per the earlier Guidance for 2Q, Apple had anticipated the revenue in the range of $63.0 billion - $67.0 billion. The company provided its quarterly guidance on January 28 this year, providing with the latest information available at that particular point of time, along with the best estimations on the speed of return to work after the close of the extended Chinese New Year holiday on 10 February 2020.
In the last 13 months, this is the second time that Apple has had to slash its guidance because of the disturbances in China. Earlier in January 2019, the Company had cut its revenue guidance for the fiscal 1Q of 2019 because of low iPhone sales in China.
Why China is so important for NASDAQ: AAPL?
The reasons cited for the inability to meet the earlier provided revenue projection for Apple’s second quarter period are mainly said to be the lesser demand of iPhones in China and lower supply of them globally (temporary phase).
Apple manufactures most of the iPhones and other products (including Mac, iPad, wearables, home, and accessories) in China. Due to the COVID-19, all the Apple’s retail stores in China were temporarily closed and manufacturing facilities were halted for the time being and only reopened in the Chinese region with decreased schedules last week.
- Temporary Constrained supply of iPhone:
China is the main center for manufacturing the Apple products’ components along with them being assembled there. China possesses the ability to manufacture the products’ components, which is then made available to the global customers.
As mentioned in the latest announcement by the company, all the partner sites for manufacturing the iPhones are located outside the Hubei province and have reopened their facilities now. However, they are slower in the ramp up as compared to what the Company had anticipated earlier. Apple expects shortage in supply of iPhone in global market, despite the reopening of closed stores.
Also, Foxconn is the main iPhone maker in China for the Company. A high risk of coronavirus infection was determined in one of the Foxconn facilities where the company’s products are assembled. After a long shut of the production facility, recently, Foxconn has resumed the work with only 10 percent employees returning to the facility. Two centers that have reopened are situated in the southern manufacturing hub in Shenzhen and eastern central Chinese city of Zhengzhou.
- Dip in the Demand:
The stores in the Chinese region are reopening gradually and are functioning for a smaller number of hours with very less customer footfall. The demand of Apple’s product has been reduced in 2019 on y-o-y basis. For FY 2019, the net sales in Greater China segment was $43,678 million, a decrease of 16 percent on prior year. While viewing the first quarter figure for the period ending 28 December 2019, there was an increase of 3 percent pcp to $13,578 million, from $13,169 million noted for the period ending 28 December 2018.
Apple has 42 retail stores in China, with below mentioned bifurcation.
- 1 store in Guangxi, Henan and Yunnan, each
- 2 stores in Fujian, Shandong and Sichuan each
- 3 stores in Chongqing, Guangdong, Tianjin and Zhejiang each
- 4 stores in Liaoning
- 5 stores in Beijing and Jiangsu each
- 7 stores in Shanghai
China’s contribution in the Company’s total net sales for fiscal year 2019 is 17 percent in FY 2019 as compared to 20 percent in FY 2020. Also, Greater China (including China, Hong Kong and Taiwan) has been the third largest contributor since last three years.
Situation of Stock Market Around the Globe
The effect of the update pertaining to the Apple not meeting the revenue guidance for the quarter is felt on the performances of other indexes as well. After the release of the news, the impact was felt in the Asian and other countries stocks that are as mentioned below:
- Hang Seng index of Hong Kong declined by nearly 1 percent.
- In Japan, Topix was down by nearly 1 percent and Nikkei 225 tumbled 1.40 percent, following the previous day’s losses.
- Following the industry trend, several tech companies felt the decline, with Softbank slipped by more than 4%.
- Kospi (in South Korea) slipped by 1.48 percent.
- ASX 200 of Australia was down by 0.16 percent.
- MSCI also fell down by above 1 %.
Apple’s stock last traded at $319 as of 18 February 2020, falling by 1.83 percent compared to the previous closing price. While the stock has a positive return of just 8 percent YTD (as on 14 February 2020).
The market capitalisation of the stock was noted at around1.40 trillion and the price to earnings ratio is 25.19x. The dividend yield was noted 0.97%.
Correlation of Coronavirus on economy as a whole:
The situation of business operations has halted many of the other players operating in China. As per the market reports on 17 February 2020, it is estimated that nearly 5 million companies present across the globe could be affected by coronavirus.
The condition of China’s businesses is worsening with each passing day. The areas affected with more than 100 confirmed cases (as of 5 February 2020) are home to more than 90 percent of all active businesses operating in the Chinese region. Out of these affected businesses, nearly 49,000 businesses are subsidiaries and branches of foreign companies.
To name a few, Hyundai Motor has halted their car production in some of the factories. Many of the factories and stores of Samsung Electronics present across China are closed presently.
Coronavirus is having an adverse effect on the business and economy of not only China but other countries as well who have operations or trade related to it. Apart from the tech sector, the effect is also witnessed among tourism, airlines, automotive and other production related industries.
Going forward, the Company has plans to launch a new iPhone model, however, will the disruption caused by Coronavirus in China going to delay this launch? It will be soon be unfolded in the due course.
Regarding the loss of revenue guidance for second quarter, Mr Tim Cook holds a positive outlook stating that “Apple is fundamentally strong, and this disruption to our business is only temporary.”
