China’s COVID lockdowns will cost Big Tech billions. Cisco’s $300 million hit is just the beginning

Data and networking giant Cisco reported during a quarterly earnings call that China’s aggressive shutdown caused supply shortages that cost the company about $300 million, equal to roughly 2.5% of its revenue. Cisco officials also lowered their guidance for the current quarter and the entire fiscal year, in large part due to uncertainty surrounding Chinese imports, sending shares down 15% in mid-day trading Thursday.

While Cisco doesn’t necessarily represent the tech industry at large, it’s an interesting canary in the supply chain. 

Nearly all major tech companies capped their first quarter of 2022 at the end of March, just days after the Chinese government brought the city of Shanghai, home to 26 million people and the world’s busiest port, to a standstill. Cisco, however, concluded its fiscal third quarter in April, giving it a full month of pain from the Shanghai shutdown. (A smaller but influential tech manufacturing hub, Shenzhen, went into lockdown for a few days in mid-March, with much less impact on the industry.)

Cisco CEO Chuck Robbins said demand for the company’s products globally remains robust—even as domestic inflation and higher interest rates batter American markets. But an inability to import hardware parts from China will cause damage for months on end, regardless of whether Shanghai fully reopens as planned in June, Robbins said. Cisco now forecasts year-over-year revenue growth in fiscal 2022 of 2% to 3%, down from estimates made in January of 5.5% to 6.5%.

“When they open up and when they do allow transportation logistics to start up, we believe there is going to be a high degree of congestion,” Robbins said. “We believe that there is going to be lots of competition for ports capacity, airport capacity. Combined with the inbound efforts—trying to get raw materials back into the country, etc.—we just believe that it’s going to be impossible for us to catch up on this issue in Q4.”

Robbins’ outlook bodes poorly for a wide range of businesses, including tech companies, electric automakers, and electronics manufacturers. A Bloomberg analysis of earnings call transcripts and financial statements from the first quarter identified more than 180 companies discussing China and its lockdowns.

Apple already predicted in late April that Chinese shutdowns could cost it $4 billion to $8 billion in the current quarter (the company posted revenue of $97.3 billion in the first three months of 2022). A Nikkei Asia analysis found about half of Apple’s top 200 suppliers operate in Shanghai—though some factories there have remained open, with employees temporarily living on-site.

Microsoft said in late April that extended shutdowns into May would hurt its equipment manufacturing, Surface computer, and Xbox console business.

Tesla has operated its Shanghai plant at less than half-capacity or worse for multiple weeks, per Reuters. The factory accounts for roughly 40% of Tesla’s potential output, though that share will decline as two new plants ramp up this year. Longtime Tesla bull Wedbush Securities lowered its price target on the stock Thursday, calling the China snags “an epic disaster so far in the June quarter.”

The Shanghai lockdown has renewed talks about shifting manufacturing and sourcing out of the country, with China hawks already pointing to several efforts to bring production back to friendlier soil. Intel plans to build multibillion-dollar plants in Ohio and Germany. Tesla opened manufacturing hubs in Texas and the Berlin area this year.

But as CNBC reported this week, foreign direct investment in China jumped 26% year-over-year in the first four months of 2022, with U.S. investment up about 50%, according to China’s Ministry of Commerce. 

“Supply chain diversification is quite tricky because people always talk about it, and boardrooms love to discuss it, but often at the end of the day people find it’s difficult to implement,” Nick Marro, global trade lead at The Economist Intelligence Unit, told CNBC.

Robbins echoed the sentiment on Wednesday’s call, signaling that tech companies will remain tethered to China’s COVID whims for the near-future.

“We did not have a plan for a country to shut down,” Robbins said. “And so it takes time to go out and create that geographic resilience, but our teams are working on all of those kinds of things right now.”

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Jacob Carpenter

NEWSWORTHY

Safe for now. Meta CEO Mark Zuckerberg told employees last week that he doesn’t anticipate needing to lay off employees, but company officials are scaling back on hiring as Wall Street seeks better profits in the bear market, The Verge reported. In an all-hands meeting, a recording of which The Verge obtained, Zuckerberg said the company remains “in a very strong position,” with no immediate plans to trim its workforce through job cuts. A Meta spokesman confirmed to The Verge that some divisions will reduce engineer hiring, though recruiting for machine learning and artificial intelligence jobs continues. Meta shares are down 43% year-to-date.

Game on in Asia. TikTok owner ByteDance is planning a significant venture into mobile gaming on the social media app, with testing underway for an initial rollout in Vietnam, Reuters reported Thursday. Sources familiar with the matter said TikTok could start a wider rollout in southeast Asia as early as the third quarter of this year, though company officials declined to comment on the report. A move into the fast-growing mobile gaming sector could boost time spent on the app and revenue generated through ads.

A cold crypto winter? Securities and Exchange Commission Chair Gary Gensler predicted Wednesday that many cryptocurrencies will fail following the swift demise of stablecoin TerraUSD and linked token Luna this month, The Wall Street Journal reported. Gensler’s comments, made after a House Appropriations Committee hearing, follow his recent calls for tighter federal regulation and stronger investigative oversight of cryptocurrencies. Gensler said he fears that future crypto turmoil “will undermine some of the confidence in markets and trust in markets writ large.”

Giving Elon the boot. S&P Dow Jones Indices removed Tesla from its environmental, social, and governance index following allegations of workplace harassment and the electric automaker’s response to federal investigations into crashes involving the company’s vehicles. The move prompted a rebuke Wednesday from Tesla CEO Elon Musk, who called ESG “a scam” and claimed the S&P “has lost their integrity.” Tesla’s drop came as part of an annual re-evaluation of the 308-member list, which also resulted in Meta, Berkshire Hathaway, and Broadcom failing to make the cut.

FOOD FOR THOUGHT

Not playing around. The digital gaming startup landscape is getting a jolt of cash from a huge name in venture capital. VC giant Andreessen Horowitz announced Wednesday it’s starting a $600 million fund to invest in game studios, infrastructure companies, and software providers, Protocol reported. The new fund signals a deeper foray into video games for the firm, which has already invested in Oculus (since acquired by Meta), Zynga, Roblox, and Sky Mavis. While mobile, console, and blockchain gaming revenue continues to rise, shares in some of the industry’s largest companies have been pummeled by China’s crackdown on gameplay and a broader pullback in tech stocks.

From the article:

The new $600 million fund does represent the VC firm's most serious effort yet to tap into the fast-growing game industry, which experienced unprecedented growth following the pandemic and is on track to break $200 billion in global revenue this year. 

The fund will collaborate with Andreessen's crypto fund to co-invest in blockchain gaming deals, an Andreessen representative told Protocol.

IN CASE YOU MISSED IT

Billionaire Tesla bull urges Musk to announce historic $15bn stock buyback as carmaker’s share price sinks, by Christiaan Hetzner

What is Discord? App at the center of investigation for its role in the deadly Buffalo supermarket shooting spree, by Christiaan Hetzner

Crypto exchange FTX.US expands to take on Schwab and Robinhood, by Declan Harty

Billionaire Mike Novogratz breaks silence on Luna after hyping the coin for years, including with his own tattoo. ‘It was a big idea that failed’, by Taylor Locke

Amazon is discriminating against pregnant and disabled workers, New York state agency claims in complaint, by Haleluya Hadero and The Associated Press

With Roe v. Wade in jeopardy, some fear tech surveillance of pregnancy, by Maryclaire Dale and The Associated Press

BEFORE YOU GO

Showdown in San José. Costa Rica is at war (sort of). As The Verge reported Wednesday, the Central American nation’s new president is waging battle with a determined ransomware gang that has infiltrated about two dozen government institutions. The cyberattacks, which have raged since April, have slowed Costa Rica’s ability to collect taxes and taken down its online customs platforms. A cybercriminal collective known as Conti, believed to emanate from Russia, has demanded $20 million and threatened to overthrow the Costa Rican government, though security experts believe the latter threat isn’t serious. American diplomats have stepped in to help, offering a reward of up to $10 million for information on the gang’s leaders.