BEIJING – With little warning, China locked down the world’s largest iPhone factory on Wednesday, declaring the zone around the Zhengzhou Foxconn Technology Group complex off-limits to combat a local Covid-19 outbreak. It is the last thing Apple needed.

The abrupt move is expected to further disrupt a factory already grappling with an outcry over an on-site coronavirus outbreak, worker exodus and enforced quarantine. The local authorities said on Wednesday that they would sterilise Foxconn’s campus and the surrounding areas in the next three days and send N95 masks to workers, another sign of the government’s tightening grip.

It served up a stark reminder of the dangers for Apple of relying on a vast production machine centred on China in a time of unpredictable lockdowns and uncertain trade relations. The company’s shares fell 3.7 per cent on Wednesday, dragged down in part by the latest comments from United States Federal Reserve chairman Jerome Powell.

“The Zhengzhou plant plays a monumental role in increasing capacity ahead of the holiday season,” said Ms Nicole Peng, an analyst with Canalys. “Some of the orders generated in holiday promotional campaigns may not be able to be immediately delivered. Product delivery in certain channels could also be delayed.”

For now, Foxconn’s plant will keep operating within a “closed loop”, or a self-contained bubble that limits contact with the outside world, the company said in a statement on Wednesday. This will keep some production going, but Foxconn did not address questions about how it will ship goods in and out of the compound during the area’s lockdown.

President Xi Jinping’s Covid-19-zero policy, which relies on swift lockdowns to stamp out the disease wherever it pops up, has shown little regard for the economy and thrown swathes of the global supply chain in disarray. It has curtailed output for big names, from Tesla to Toyota Motor, often with little advance warning. But Apple is by far the largest business to adopt China as its factory floor.

Zhengzhou is the site of Apple’s most critical production, churning out four in five of its latest-generation handsets and the vast majority of iPhone 14 Pro units, according to Counterpoint senior analyst Ivan Lam. Apple relies on its smartphone for roughly half its revenue, and the lockdown comes in the middle of its peak production season in the build-up to holiday season shopping.

Apple’s iPhone production ramps up to tens of millions of handsets a month at its peak – hundreds of thousands a day – every one of which needs a plethora of components, from chips and displays to casings.

A big reason why Apple’s suppliers have not yet shifted more of its iPhone production out of China is the accompanying component supply chain, which largely makes parts in China, according to Mr Lam. Even India, which is the only other country with a plant qualified to produce iPhone 14 Pro units, mostly gets its components shipped in from China and just does final assembly and packaging.

Apple did not respond to a request for comment.

Chinese officials have allowed so-called green lanes for important enterprises during past lockdowns, but the sheer scale of Apple’s logistical needs might give some pause. Foxconn also urgently needs workers to replace those who have left, and it is hard to hold a recruitment drive when crowds are forbidden. 

While Foxconn should have enough materials stockpiled to keep production humming for weeks, questions remain about whether it will be able to ship any finished products out. The language of Zhengzhou’s lockdown notice is unequivocal in forbidding all activities and vehicle movements other than those for essential purposes, like the distribution of medical supplies. Foxconn’s inventory will eventually need replenishing, in any case.

As China’s largest private sector employer and a key tax contributor in Zhengzhou, Foxconn will likely win concessions from local officials – but those will need to be significant. China’s top chipmaker, Semiconductor Manufacturing International Corp, worked with the local authorities to transport much-needed materials to its Shanghai plant when the financial hub was in total lockdown early this year.

Much now depends on the length of the lockdown, which is intended to last for a week until Nov 9, but officials elsewhere in China have extended such actions for weeks, sometimes months, at a time.

Foxconn has sought to mitigate the potential disruption by raising wages and arranging for backup from its other Chinese plants should assembly lines stall in Zhengzhou.

Apple can handle 100 per cent of orders for iPhone 14 and older models via other sites within China, but has only a handful of much smaller locations qualified to handle the iPhone Pro. Its main alternative is a smaller plant in Guangdong province, Mr Lam said.

Ms Peng said that some of Foxconn’s factories in other parts of China have not been running at full capacity due to Covid-19 disruptions, among other reasons. BLOOMBERG