The explosion at Foxconn’s plant in Chengdu, China, could result in a production loss of 500,000 Apple Inc. iPad 2 tablets in the second quarter, according to a new analysis from IHS iSuppli (NYSE: IHS). Total iPad 2 production capacity at the Chengdu site amounts to about 500,000 units per month. If the explosion results in a production shutdown until the end of June—which may or may not happen, depending on the outcome of the still-pending investigation—a production stoppage of half a million units could result. Should the production suspension last longer, the impact on production could be even greater.
Foxconn chairman Terry Gou reportedly said that the explosion will not delay the production of the iPad in the third quarter. However, IHS iSuppli believes this view is dependent on a return to full production pending the results of an investigation. IHS iSuppli research indicates there likely will be some impact on production in the second quarter.
While most iPad 2 production takes place at another Foxconn facility in Shenzhen, that plant may not be able to compensate for all the lost output in the second quarter at the Chengdu site. The Shenzhen facility at present has capacity to produce 7.5 million units in the second quarter—iSuppli forecasts 7.4 million iPad 2 units will be shipped out during this period. To support these shipments, Foxconn must manufacture a larger quantity of devices, at between 7.8 and 8.1 million units during the second quarter. This means that Foxconn’s shipments will fall short of expected levels by between 300,000 and 600,000 units in the second quarter.
One Wall Street analyst predicted that owing to the Chengdu disaster, iPad 2 production could fall by as much as 2.8 million units and manufacturing could drop by 36 percent in the third quarter. IHS iSuppli believes this outlook is too pessimistic. The impact of this disaster will only last for the short term, given that there are more than 10 factories in the Foxconn Chengdu plant, and because the explosion occurred on the third floor of one of the buildings. Chengdu just recently commenced production of the iPad 2 at the start of 2011, with the plant recently accounting for approximately 20 percent production of the iPad series. Furthermore, the shortage of raw components due to the Japanese earthquake in March already had slowed down the production ramp at the Chengdu plant.
The impact of the explosion will reignite the debate regarding Apple’s corporate responsibility. This debate began in 2010 when a number of Foxconn employees committed suicide and blame was placed on working conditions. Apple as a global company is accountable to all stakeholders for the conduct of its business, and the proper balance of safeguards and regulation will be debated because of the multiplicity of opinions on the topic. In the end, Apple will have to drive a level of corporate responsibility that is acceptable to its stakeholders.
Until more information is available about the cause of the explosion and deaths of three Foxconn employees, its unclear how this disaster will impact the relationship between Apple and Foxconn. Apple is the final authority for all decisions regarding production, component suppliers and other aspects of production. From a process and quality point of view, Apple must have deemed the Chengdu facility acceptable.
While Foxconn has demonstrated the capability to quickly ramp up manufacturing and is likely already taking steps to compensate for the disaster, this incident will increase pressure on Foxconn and its customers to address workplace safety.