Apple's iPhone supplier Pegatron cuts production in Shanghai factory as city's strict Covid-19 lockdown limits output

·4 min read

Apple's tightly managed supply chain network has taken another hit in mainland China, as Taiwanese contract manufacturer Pegatron Corp cut production at its factory in Shanghai, where a strict Covid-19 lockdown remains in force.

Pegatron, one of Apple's largest suppliers focused on certain iPhone models, said on Thursday that its production of communications devices and consumer electronics will decrease this quarter because operations at its major assembly plant in Shanghai are constrained by the citywide lockdown measures. It did not elaborate on the specific volume of products to be reduced.

New iPhone models, including the latest iPhone SE series, are likely to see a drop in overall volume this quarter because of the supply chain disruptions on the mainland, according to Ivan Lam, a Hong Kong-based senior analyst at Counterpoint Research.

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Pegatron representatives in Shanghai and at the firm's headquarters in Beitou District, Taipei, declined to comment on Friday.

The main campus of Apple supplier Pegatron Corp's manufacturing complex in the outskirts of Shanghai. Photo: Zeng Dejian alt=The main campus of Apple supplier Pegatron Corp's manufacturing complex in the outskirts of Shanghai. Photo: Zeng Dejian>

Last month, Pegatron suspended production at its key factories in Shanghai and nearby Kunshan, a city in eastern Jiangsu province. The Kunshan plant has reportedly resumed production after the local government lifted some control measures.

The operations in Shanghai remain constrained. Shanghai authorities, however, are poised to loosen strict Covid-19 control measures that have been in place for nearly seven weeks by May 20, when the city expects to achieve its "societal zero-Covid-19" target - referring to a situation when new cases are limited only to people in quarantine.

The Taiwanese contract manufacturer's production volume cutback in Shanghai raises the stakes for Apple to make further adjustments to its supply chain strategy on the mainland.

More than half of Apple's 192 suppliers that manufacture on the mainland - including Foxconn Technology Group, Pegatron, Quanta Computer, Wistron Corp and Compal Electronics - have production facilities in lockdown-hit Shanghai and eastern Jiangsu province, according to calculations by the South China Morning Post.

A supervisor holds an iPad as he checks an employee's badge during roll-call at Apple supplier Pegatron Corp's factory in Shanghai on April 15, 2016. Photo: Bloomberg alt=A supervisor holds an iPad as he checks an employee's badge during roll-call at Apple supplier Pegatron Corp's factory in Shanghai on April 15, 2016. Photo: Bloomberg>

Shifting some iPhone production capacity to another major supplier on the mainland - specifically, Foxconn Technology Group - could help Apple bolster supplies, according to Counterpoint's Lam. Foxconn, the world's largest electronics contract manufacturer, is Apple's prime iPhone supplier.

Apple last month estimated that supply chain constraints could hurt sales by up to US$8 billion in the June quarter, as the recent lockdowns in China centred around the Shanghai corridor where Apple's manufacturing partners operate plants for final assembly.

In Apple's quarterly earnings conference call with analysts last month, chief executive Tim Cook indicated that the company continues "to look at optimising" its supply chain. "In terms of geographic production, we are constantly making tweaks here and there," he said.

Cook confirmed that the main causes of supply chain constraints, which affect most of Apple's product categories, are the ongoing semiconductor shortages and Covid-19-related disruptions.

Foxconn, formally known as Hon Hai Precision Industry, has also been dealing with production constraints amid strict implementation of China's zero-Covid-19 policy.

Most of the group's factories on the mainland have continued production under a "closed-loop" system that confines employees within its campus. Foxconn has also put a lot of effort into communicating closely with local governments, group chairman Liu Young-way said on Thursday during the company's earnings call.

Taiwanese manufacturer Quanta, a major supplier for Apple's MacBooks, last month halted production at its factories in Shanghai, Chongqing and Changshu, a city in eastern Jiangsu province, because of Covid-19 control measures in those locations.

Despite the recent supply chain disruptions in China, it would be difficult for Apple to quickly move its deeply-rooted supply chain network on the mainland to other countries, like India, because of the lack of skilled labour and governance risks, according to Counterpoint's Lam.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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