- The tech giant is trying to redirect supply chains to India and Vietnam amid fears of over-reliance on China.
Taipei, Taiwan – Scenes of chaos erupted at Apple supplier Foxconn’s mega factory in Zhengzhou, China, last month as workers, angered by COVID-19 quarantine and unpaid wages, scuffled with security personnel.
The unprecedented protests in “iPhone City” have caused significant delays for the latest iPhone models at the end of the year, Apple’s busiest sales season, putting its 14-quarter growth streak at risk. For Apple, which produces about 90 percent of its products in China, there is no easy remedy.
“This can’t be fixed in the short term, you can’t build iPhone cities so easily in other parts of Asia,” Shehzad Qazi, managing director of consultancy China Beige Book, told Al Jazeera.
“The supply chains of companies like Apple are incredibly vulnerable because they are concentrated almost exclusively within China,” Qazi added.
In May, Chief Executive Tim Cook, who cultivated friendly ties with Beijing by agreeing to remove politically sensitive apps and store Chinese user data within reach of local authorities, entertained Vietnam’s Prime Minister Pham Minh Chinh on the Apple Park campus in Cupertino, California.
Apple did not respond to Al Jazeera’s request for comment.
China’s dominant position in Apple’s supply chain has gradually declined in recent years. Until 2019, China was the primary location for about 44-47 percent of Apple’s supplier production sites. China’s share fell to 41 percent in 2020 and then to 36 percent in 2021.
JPMorgan has estimated that Apple could manufacture 25 percent of all iPhones in India by 2025.
The trend has drawn suggestions that Apple’s investment in China may have peaked. However, despite changes in production, Apple’s deep-seated presence in the country, where at least 95 percent of all iPhone manufacturing still occurs, is likely to make diversification challenging.
“Apple is not leaving China,” a former Apple executive who worked in China told Al Jazeera on condition of anonymity.
China has been a key source of the company’s profitability, the former executive said, with the country’s labor market optimized to meet the peaks and troughs of Apple’s seasonal production cycle.
China, for example, facilitates Apple’s on-demand access to a vast group of migrant workers, allowing assembly lines to increase up to 1 million workers before the launch of a new iPhone and shrink to a fraction of that during quieter periods.
“This doesn’t exist in India and Vietnam probably doesn’t have the population needed for Apple’s scale,” the former executive said.
China’s industrial groups also benefit the company, he added. Many major suppliers are willing to work for less when they partner with Apple, so they can learn from their supply chain prowess and, in turn, win more contracts with Chinese brands to reflect Apple’s success.
“Apple’s business model is to force suppliers to compete with each other to avoid relying too heavily on a single supplier,” he said.
Apple seems to be leaning more toward that strategy to spread supply chain risks.
In addition to diversifying into Vietnam and India, Apple also plans to hire a wider cohort of suppliers in China. The reason is that choosing more winners from the pool of competing companies will stop the emergence of single points of failure.
Compounding the headaches of Beijing’s COVID problems are Washington’s new restrictions preventing U.S. companies from doing business with the most innovative companies in China’s tech ecosystem.
In October, Apple canceled its contract with top Chinese memory chip maker Yangtze Memory Technologies after the company was blacklisted as part of U.S. President Joe Biden’s growing campaign to hamper China’s tech sector amid alleged national security concerns. Apple had initially planned for the Chinese firm to eventually supply up to 40 percent of the transistors needed in all iPhone models.
This leaves Apple with little choice but to deepen its reliance on the U.S.-led supply chain. Apple has since turned to South Korean rival Samsung for the NAND flash memory it hoped the Yangtze would provide, DigiTimes reported last month.
Meanwhile, the company is poised to increase its reliance on Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest maker of advanced chips. Apple confirmed this month that it would use the Taiwanese chipmaker’s four-nanometer and three-nanometer chip manufacturing processes for its custom A- and M-series chips.
Geopolitical tensions over Taiwan’s self-rule, which Beijing claims as its territory that must be “reunified” by force if necessary, add to the complicated combination of factors influencing Apple’s prospects for China. While Washington does not officially recognize Taipei, Biden has repeatedly indicated that he would commit U.S. forces to defend the island in the event of a Chinese invasion.
After enjoying years of stability between the United States and China, Apple must now navigate intensifying geopolitical competition between the world’s two largest economies that includes one of the most dangerous flashpoints.
“Keep in mind that both Tim Cook and Joe Biden showed up in Arizona for the start of new US-based TSMC factories,” Elmer-DeWitt added, referring to a recent event in which TSMC announced it would increase its investment for U.S.-based semiconductor plants from $12 billion to $40 billion.
Meanwhile, uncertainty persists about exactly how and how quickly China will emerge from “zero Covid”. Although Beijing has lifted some of its most draconian restrictions in recent weeks, restrictions such as quarantine for international travel remain, while the rapid spread of the virus through the population has increased the possibility of significant disruption and death.
“Investors need to understand that the end of zero COVID will be a process, not a one-time event,” Qazi said, adding that restrictions that have been lifted could be reimposed until enough of the population has been inoculated with mRNA vaccines.
“China has become an increasingly complicated place for foreign companies, especially American ones, to operate,” Qazi said. “This means that Western companies and Western countries will feel a huge impact of China’s social and political policies.”
Source: AL JAZEERA
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