What the Foxconn explosion means for AppleMay 20, 2011: 2:55 PM ET
An analyst sketches out the economic implications in two scenarios: One serious, one less so
According to Abramsky, the plant is one of two primary manufacturing sites where the iPad 2 is produced, the other being Foxconn's original Shenzhen facility. His sources disagree, however, about the two plants' relative importance. Some believe the majority of iPads were being manufactured at Chengdu; others say that Chengdu was having trouble ramping up, and that the majority of iPads were still being manufactured in Shenzhen.
Accordingly, he offers two scenarios: (I quote)
1) Serious Business Impact. Under this scenario, Chengdu manufactures most iPads and the explosion is serious; i.e. Apple is unable to utilize alternatives or get back on stream by June. If so, it could be negative for Apple's Q3 (June); stoppage of Chengdu until end June may equate to the lost production of 1.8-2.8M units Q3, which is 22-36% of our expectations for 8M iPad shipments Q3. If Foxconn is unable to pick up the slack by June, it could also cause production shortages for Q4/F11 (end Sept). Under this scenario, Q3 revenue may be impacted by $1.1-1.7B (4-7%) and EPS $0.35-0.55 (6-9%), which at current valuation represents $5-7 downside to shares.
2) Less Serious Business Impact. Under this scenario, either Shenzhen still makes most iPads and is unaffected, and/or Foxconn is able to re-start iPad production quickly at Chengdu. Estimating a 1 month production impact, would perhaps equate to <1.3M units Q3 with limited impact to Q4. Under this scenario, revenue would be impacted by <$800M (<3%) and EPS <$0.26 (<4%) which at current valuation represents less than $3 downside to shares.
The fact that Apple's shares dropped only 1% on Friday suggests to Abramsky that investors are pricing in scenario 1. (Apple fell another 0.5% to close the day at $335.22.)
For videos of the aftermath, see here.