Supply shocks and sagging demand: A coronavirus 'perfect storm' hits Apple

Apple's supply chain has been battered for months by the fallout from the novel coronavirus, and the pandemic has the potential to disrupt its usually meticulous plans for the production of future products, as well as their sales. Now, just as manufacturing in China seems poised for a rebound from its coronavirus-related shutdown, Western economies seem ready to collapse. How bad can it get?

"With Apple a few months ago, the big issue appeared to be the supply chain and demand in China, as Apple is kind of the poster child for any weakness in China," Daniel Ives, managing director of equity research at Wedbush Securities, told Protocol. "In the last seven days, this story vastly changed for Apple because now it's become more of a global demand story for iPhone coupled with supply chain issues."

Everything seems uncertain now down to the point that one might wonder what will happen to Apple's celebrated September iPhone event. Still, it's not necessarily all doom and gloom for Apple, even if the economy really goes down.

What's happening with Apple's supply chain

Of all the tech giants, Apple was one of the first to feel the coronavirus impact due to its reliance on Chinese manufacturing. In an investor note in February, the company wrote an update on its iPhone manufacturing plants indicating that "while all of these facilities have reopened — they are ramping up more slowly than we had anticipated."

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It's beginning to look as if the tide has turned on coronavirus in China, and the company at least appears to be trying to project a sense of normalcy in these highly unusual times: On Wednesday it announced an updated version of the MacBook Air and iPad Pro, along with a new keyboard case with a built-in trackpad.

But even in these announcements, there were hints of disruption. Production may be somewhat stilted throughout 2020 — the new iPad Pro keyboard that was announced won't be released until May, for example. It's highly unusual for Apple to have released a new piece of hardware and then admit that it won't have the primary accessory for that device ready until several months later. The new products were also announced without the usual Apple special event. One had been rumored for the end of the month, but it's safe to assume that it won't happen in recognizable form. (What will happen with the rumored lower-cost iPhones that were supposedly coming?)

Looking ahead, it's fair to start questioning what the supply chain disruption could mean for the products Apple was planning for its yearly September unveiling of new flagship iPhones. Apple appears to be pushing ahead with products even if consumers can only get them online, but according to a research note from longtime Apple analyst Ming-Chi Kuo, production will likely remain low for the quarter. Wedbush's Ives said he thinks it will be a rough year for Apple that could see it slip behind the offerings of competitors, especially in the burgeoning 5G phone market.

"It's really created a perfect storm, both in the supply chain as well as [on the] demand side," Ives said. "The chances of [Apple] getting 5G phones out for launch by the fall look slim to none."

Nevertheless, rest assured Apple will have products to sell. Now the problem is: Who is going to buy them?

OK, but what about demand?

In its February note, the company wrote that "[o]utside of China, customer demand across our product and service categories has been strong to date and in line with our expectations."

Since then, Apple closed all its stores outside China, and the financial markets around the world have been absolutely hammered. In many countries, people are shut up indoors, and the crisis shows no signs of waning.

Thankfully for Apple, it still has its online retail channel up and running. In a recent note, Gene Munster of Loup Ventures said he expects some of the purchases people would've likely wanted to make in person will shift to online or mobile purchases, which should help stem some of the damage from lost retail-store sales.

The real unknown, for Apple as well as everyone else, is how continued market volatility affects consumer demand. If a global recession sets in as a result of coronavirus, any pent-up consumer demand may dissipate. "The risk of a global recession raises the chance of some level of demand destruction," according to a March 16 research note from Katy Huberty, managing director in research at Morgan Stanley.

If the recession is short, Ives said it will just be a "'Nightmare on Elm Street' six months" for Apple and other tech companies, but if it goes on longer, and more companies have to start laying off employees, the consequences could be dire. "Apple is in the eye of the storm when it comes down to demand globally," Ives said.

"It's hard to see consumers going from lockdown, worrying about toilet paper, health and soap, but then three to four weeks later focused on the next iPhone," Ives added. "But I do think on the other side of this, the strong survive, and I think Apple will be in very good shape going into 5G, but this is a nightmare scenario for Apple as well as every human on earth."

Upsides and the future of the business

Apple may have been the first to feel the pain, but according to Morgan Stanley's Huberty, Apple is "best positioned for a postvirus recovery." Especially in the U.S., the company "benefits from loyal customers, stretched iPhone replacement cycles, an upcoming 5G product launch, and re-accelerating services revenue growth," Huberty added.

In recent quarters, the iPhone has generated anywhere from 40% to nearly 70% of the company's revenue, so what specifically does a short-term drop in demand mean for Apple's cash cow? In general, the average U.S. consumer has been upgrading their phones less frequently than in the past. While this usually would be a cause for concern for Apple's long-term prospects, it could be a silver lining in the time of coronavirus. Pent-up demand when life returns to normal could see more consumers interested in upgrading their phones than usual in the summertime and beyond. Huberty estimates the average consumer is now holding onto their phone for up to 4.1 years, and that foot traffic into stores is likely to "return to normal levels in the warmer summer months." (All that goes out the window, of course, if, as some suggest, this crisis extends well into the summer.)

Some parts of Apple's business could even benefit from the shelter-in-place and self-quarantine mandates that are going into effect across Europe and the U.S. Apple's services revenue is now its second-largest business behind the iPhone, and it's been on a tear for several years now. In fiscal 2019, sales of games, apps, movies, music, Apple Pay fees and subscriptions to Apple TV+, Apple News+, iCloud and other products saw Apple generate $46.3 billion in revenue. That business line alone would sit 68th on the Fortune 500. And when fewer people can go outside, there's a far greater likelihood they'll spend time buying movies, games or maybe even Apple TV+ subscriptions — whatever they can do to pass the time. (Concrete figures on how much more bandwidth is being used up for streaming are hard to come by, but some analysts, like LightShed's Rich Greenfield, expect to see an increase in streaming subscriptions and "higher utilization per account" as there's little else to do these days.)

Most likely, Apple — one of the richest companies in the world — will be able to weather whatever happens from the coronavirus. The company has over $207 billion in cash on hand, but there will likely be a short-term drop in revenue. Huberty pegged the drop at about 4.5% for the year under what Morgan Stanley had been expecting.

Apple itself issued caution to investors in February saying that it did not expect to hit the guidance it had given in January for the quarter. At the time, it gave a wide range — $63 billion and $67 billion — that it had expected to fall between. That being said, even a drop-off from the low end of that range could still come close to the $58 billion it generated in revenue in the same quarter in 2019.

"Apple is fundamentally strong, and this disruption to our business is only temporary," the company wrote in February.

How is Apple responding to the crisis

Apple CEO Tim Cook wrote in a letter on March 13 that the company would continue to pay its thousands of hourly workers — many of whom staff the company's 500-odd retail stores — their regular rates as stores outside China are shuttered. As the virus begins to wane in China, the company announced it would reopen its stores there, but would be "moving to flexible work arrangements worldwide" for staff in offices outside China.

Cook's note said that Apple would be closing its non-Chinese stores until March 27, but it seems as of March 17 they're closed "until further notice."

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Not everyone can easily work from home, mind you. The Wall Street Journal reported this week that some workers at Apple are struggling to adapt to working from home, due to the secretive nature of the work they do. Apple's systems are set up in such a way, the Journal reported, to keep prying eyes away from products and services still in development — but that's made it harder to access files from home. As a result, some workers were still going to the office, but the company was screening those who do for fevers. It also deep-cleaned any worksites while they were still open.

Santa Clara County, where several of Apple's California offices are based, including its Apple Park headquarters, is now under a shelter-in-place order. Apple wasn't immediately available to comment on whether employees in its secretive R&D labs were still heading to the office.

The company is also striving to help those affected by coronavirus. Cook wrote that Apple has raised $15 million to date to "help treat those who are sick and to help lessen the economic and community impacts of the pandemic." It's also doubling any donations employees make to charities aiding in coronavirus relief.

Apple, along with partner Goldman Sachs, is also allowing Apple Card customers to skip their March payments without incurring any interest fees — as long as they remember to sign up.

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Cook also announced that WWDC, the annual developer conference Apple traditionally holds in the summer, will switch to an online-only conference this year, to help mitigate the spread of the coronavirus. Some 6,000 developers usually descend upon the conference from all corners of the globe.

Apple declined to comment on its coronavirus plans beyond Cook's letter.