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Chengdu Blast Heard Loud and Clear in Cupertino

By Richard Adhikari MacNewsWorld ECT News Network
May 25, 2011 5:00 AM PT

Friday's deadly explosion at a Foxconn factory in Chengdu, China, continues to dog Apple.

Chengdu Blast Heard Loud and Clear in Cupertino

The blast led Foxconn, one of Apple's major contract manufacturers, to shut down all its polishing plants.

Investors are concerned supplies of the hot-selling iPad 2 will fall off. Analysts' estimates of the impact range from miniscule to a production loss of 2.8 million units.

Apple shares closed at US$332.19 Tuesday, down $2.21, continuing slippage from Monday.

The company did not respond to requests for comment by press time.

The Pain of Lost Production

Continuing dissatisfaction with Foxconn's practices, which reportedly include forcing workers to sign pledges not to commit suicide, may impact the production of iPad 2s.

Estimates of just how much iPad 2 output will be reduced by the explosion vary.

Mike Abramsky, an analyst with RBC Capital Markets, has speculated that the explosion could lead to iPad output shrinking by up to 2.8 million units.

However Shaw Wu, an analyst with Sterne Agee, says production at other plants is being ramped up to make up for any loss.

In a note to investors, Barclays Capital said short-term disruptions are possible but the impact will be limited, and even in the worst case, Hon Hai's original plant in Shenzhen could make up for some of the shortfall caused by the blast.

There's bound to be some impact on iPad 2 production, contended Dale Ford, a senior vice president at IHS iSuppli.

"When you have a situation where there's an explosion that killed people and resulted in lost capacity, you'll have to go through a long process, including inspections," Ford explained. "In an environment where they were already stretched to the limit, saying there'll be no impact is hard to believe."

However, overly pessimistic estimates pegging the production loss in the millions are too extreme, iSuppli contends. Its own forecasts peg the iPad 2 production shortfall that will result from the Chengdu factory blast at between 300,000 and 600,000.

The disaster will only impact iPad 2 production for a short period because the Foxconn Chengdu plant has more than 10 factories, iSuppli contends.

Other Fallout From the Blast

The Chengdu factory explosion will reignite the debate over Apple's corporate responsibility, iSuppli said. That debate, which rose in profile in 2010 when it was reported that several Foxconn workers had committed suicide, led Apple to demand that Foxconn overhaul its practices.

"They've addressed the prior issues with suicide, but I'm not saying that what they've done is enough or is good enough," iSuppli's Ford told MacNewsWorld. "On the other hand, you could have situations where things can be so highly regulated that jobs go elsewhere."

All the stakeholders -- Foxconn, Apple, employees, stockholders and partners -- "must work to see what they think is the right balance in terms of workers' safety and working conditions," he added.

An acceptable resolution would help stabilize the production of iPad 2s.

Charging Into the Enterprise

The problems caused by the Chengdu factory explosion couldn't have come at a worse time for Apple.

Mac sales to the enterprise grew 66 percent during Apple's last fiscal quarter, according to Needham & Company analyst Charlie Wolf. He attributed this to the iPad halo effect.

Mac sales to government also shot up by about 156 percent, Needham said. These increases come at a time when the overall PC market is slipping.

"I think a lot of enterprise apps are moving to iPads because they are easier to build than Windows apps and at the same time are easier to use," Carl Howe, director of anywhere consumer research at the Yankee Group, told MacNewsWorld.

However, the iPad halo effect isn't solely responsible for the growth of Macs in the enterprise, Howe contended. The increasing use of cloud services is another factor.

"When most business-critical apps can be used from Web browsers, businesses have more choice of platforms and operating systems, and these aren't just the Macs but also new devices such as iPads," Howe pointed out.

"With operating costs for Macs generally lower and user satisfaction higher than those of Windows machines, it makes sense for businesses to use Macs where users want them" Howe added.

Other Apple Stuff

In other news, Apple has stepped in and told Lodsys, the company that's going after iOS appdevs for royalties on patents it holds, that the developers are covered by Apple's licenses to those patents.

Meanwhile, demand for the iPad 2 and iPhone as well as sales of Macs, international expansion and "a pipeline of innovations" continue to make Apple stock attractive, according to Barclays Capital. It predicts iPhone sales will outpace the market and believes a new product will see December sales surge this year.

Elsewhere, data privacy -- an issue over which Apple was grilled in Congress together with Google -- may give Cupertino more headaches in the days to come. The EU is turning its eye towards geolocation services on smartphones. Whether that could result in its demanding explanations from Apple and Google over their geolocation services remains to be seen.

Finally, to end this piece on a positive note, the number of apps in Apple's iOS App Store has reportedly hit 500,000.

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