Apple Warns Coronavirus Could Jeopardize Orders For 45 Million Airpods

Demand for Apple's popular Airpods, both the original version and the slightly more expensive second generation model, have become an unexpected hit for the consumer-tech giant. Apple's latest earnings report helped emphasize this as sales of the wireless headphones were a big component in the revised guidance that helped inspire a rally that drove the company's market cap close to new records.

But waiting periods for the second-generation Air Pods might seriously swell if Apple's suppliers can't produce the 45 million pairs that the company has ordered for the first half of the year, Nikkei reports.

The US tech giant had ordered its suppliers to produce up to 45 million units in the first half of the year to keep up with surging demand for the wireless earphones.

Now, however, the current stock of AirPods is running low, with most of the finished products reserved for Apple's own online and offline stores, the sources said. Currently, the standard AirPods are still in stock, according to Apple's official online store, while there is a one-month waiting period for the premium AirPods Pro launched last September.

Three Apple suppliers charged with assembling Air Pods have at best two weeks of materials left before they will need to re-up from other suppliers across China, many of which have halted production. Several of the three main suppliers are supposed to return to work on Monday, but their productivity levels might remain mired at below 50% of peak capacity.

Luxshare Precision Industry, also known as Luxshare-ICT, Goertek and Inventec, the three key manufacturers of the AirPods, have halted the majority of production since the Lunar New Year break began, two people familiar with the matter told Nikkei. The three companies now have at most two weeks' worth of materials and components needed for AirPods assembly, and must wait for component makers across China to restart operations in order to receive fresh supplies, the people said.

"Because of the virus outbreak, it has already been about two weeks since the assemblers have shipped any new AirPods series," said a person familiar with the situation. "All of the stores and carriers selling Apple products are really counting on suppliers to resume work next week..

The three major AirPods assemblers, like other Apple suppliers, are scheduled to resume work on Monday, but their production utilization rates may reach just 50% at best in the first week given the current conditions, a source familiar with the matter said.

"One of the big concerns is whether other parts suppliers in China can smoothly resume work to produce enough parts for final assembly," the person said. "We really have to wait and see how things play out next week. If the assemblers could not get enough supply of parts in two weeks, it will be a big problem."

Travel restrictions across China could create labor shortages, as migrant workers who returned to the countryside for the LNY holiday have largely been stuck there.

The decision to resume production isn't being taken lightly. President Xi has warned local authorities that they could be severely punished if they fail to contain the virus. So companies will need to have a really convincing argument if they're hoping to resume production before the higher-ups have given the all-clear.

During the depths of the trade war, Apple had asked suppliers to look into moving elsewhere, and preliminary plans were made to shift more production to Vietnam. However, the signing of the 'Phase 1' deal put these plans on hold, not that Apple's suppliers would be able to ramp up production that quickly anyway. Right now, Vietnamese border restrictions would prevent Chinese managers and supply-chain experts from traveling to Vietnam to oversee the shift.

Apple had asked two of the AirPods suppliers - China's Luxshare Precision Industry and Goertek - to build AirPods production sites in northern Vietnam when the US and China trade war escalated last year. However, due to signs that tensions between Washington and Beijing were easing, Apple was no longer in such a hurry to build up AirPods capacity in the Southeast Asian country, people familiar with the plans told the Nikkei. Currently, the majority of AirPods production remains in China.

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"For the fast-growing AirPods segment, the coronavirus outbreak only creates the supply shortage issue...the demand won't be hampered much," said Jeff Pu, an analyst with GF Securities. "We and most investors do expect the production could gradually pick up the pace once production resumed...As for how fast, there are still uncertainties, as it depends on whether the contagious disease is contained."

Whether or not Apple's suppliers move ahead with plans to shift production to factories in Vietnam could be a reliable bellwether for the outbreak and its long-term impact on China's manufacturing sector. What if one of the ancillary repercussions of the outbreak is it hastens China's transition to a 'services-based' economy?

Shares saw a muted reaction to the news, as Apple investors mostly shrugged. Wake us up if Tim Cook lowers the guidance.