Apple is planning the big move out of China

resr 5paisa Research Team

Last Updated: 9th December 2022 - 12:00 pm

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Apple diversifying its supply chains out of China and looking more intently at India and Vietnam is nothing new. However, now the shift is likely to become more vigorous and quick. Apple has now accelerated plans to shift some of its output outside China and Taiwan due to the growing political conflicts between China and Taiwan. For a long time, China was the first port of call for any large global company looking for outsourcing manufacturing. To that extent, China had already emerged as the factory to the world. That is now changing, especially after the political turmoil and the recent COVID related challenges.

Apparently, Apple has been already telling its major suppliers to actively scout for opportunities for assembling Apple products elsewhere in Asia. Two countries already on the radar of Apple are  India and Vietnam. Considering that Taiwan is now getting politically exposed to China, Apple is also exploring ways of reducing its dependence on Taiwanese assemblers like Foxconn Technology Group, which have for long been the backbone of Apple’s international foray. The latest decision came after riots broke out at one of the iPhone plants after nearly 300,000 workers protested over poor wages and abysmal working conditions. Clearly, Chinese workers are becoming more militant, not a very good sign.

The problems at the Apple Zhengzhou factory had been worsened by concerns over wages and COVID-19 restrictions. While China does not let too much come out in the press, social media has played a big role in bringing out such things for public consumption. Based on geographical coordinates based analysis, the location has been confirmed as being the Apple Zhengzhou factory. With the upheavals, Apple no longer feels comfortable about China being a stable manufacturing centre. 

According to senior executives at Foxconn, the change this time around is a lot more fundamental. In the past, nobody really paid attention to concentration risks. It was believed that free trade was the norm and will remain the norm. Hence things were assumed to be a lot more predictable. Post Trump, Xu Jintao and COVID 19, the world has entered a new defensive phase of diversification. Apple wants its supply chain to draw from a bigger pool of assemblers. It is not just that they want to move out of China, because a lot of such outsourcing and assembling is also being spread across more Chinese companies.

What are concerns that clients like Apple have had in the recent past? The concerns include Chinese supply-chain disruptions caused by very stringent anti-Covid measures, power shortages and labour related issues. However, for now there are enough companies in China itself helping companies like Apple diversify. Clearly, China still brings the risk taking ability and the ability to supply the necessary manpower and skill sets to manufacture goods at that scale that the likes of Apple want. China has virtually excelled in the area of new product introduction (NPI), which entails assigning teams to work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan.

However, it is not like Apple will shift out of China in a jiffy. It is a relationship that has been built and nurtured over the last 25 to 30 years. For instance, Apple and China have worked hard towards setting themselves into a relationship that has been mutually beneficial. While Apple will still tinker with the likes of Vietnam and India, the Chinese have built an ecosystem that is strong and business friendly. No large manufacturer in the world would really want to give up on that advantage. However, changes may come from the fact that younger Chinese don’t want to work for lower wages or under a repressive regime.

Apple executives have confessed that the longer-term goal for Apple would be to ship 40% to 45% of iPhones from India. Currently, it is still in single digits. Vietnam may shoulder the manufacturing responsibility for other Apple products such as Air-Pods, smartwatches and laptops. For a long time, China supplied a literate and diligent workforce, political stability and a captive market for Apple’s products. That is a combination that Apple may not be able to find in any other country. Since the outsourcing contractors for Apple were the Taiwanese players like Foxconn and Pegatron, their familiarity with mainland China was absolutely understandable. For China, Apple has been the engine for jobs and growth.

Executives at Foxconn admit that India and Vietnam may have their own challenges too. For instance, Vietnam may be short of workers with working population less than one-tenth of China. Vietnam may not have capacity to handle the scale of an Apple Zhengzhou factory. Foxconn believes that India can match China in numbers but the level of governmental coordination my not be there like China. Apple has, in the past, found it hard to navigate India. Probably, the future of Apple may not be another city like Zhengzhou, but a cluster of smaller iPhone villages. It remains to be seen how this is put into practice.
 

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