February 3, 2023

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Apple looks beyond ‘iPhone factory’ China as dalliance sours

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Tech giant is seeking to redirect supply chains to India and Vietnam amid fears of overdependence on China.

Taipei, Taiwan – Scenes of mayhem erupted at Apple supplier Foxconn’s mega factory in China’s Zhengzhou last month as workers, angered by COVID-19 quarantine and unpaid wages, scuffled with security personnel.

The unprecedented protests at “iPhone City” have caused significant delays for the latest iPhone models at the year’s end – Apple’s busiest sales season – putting at risk its 14-quarter growth streak. 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-run, you can’t build iPhone cities that 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’re concentrated almost exclusively within China,” Qazi added.

The crisis has underscored the rising costs of operating under China’s “zero-Covid” strategy – which Beijing is scrambling to unwind after nearly three years of lockdowns and border controls – and added to the tech giant’s urgency to reroute its supply chains.

Apple is accelerating plans to have more of its new products made elsewhere, especially in Vietnam and India, the Wall Street Journal reported earlier this month.

In May, Chief Executive Tim Cook, who cultivated friendly ties with Beijing by agreeing to remove politically sensitive apps and store Chinese users’ data within reach of local authorities, entertained Vietnam Prime Minister Pham Minh Chinh at the Apple Park campus in Cupertino, California.

In September, Apple announced it had begun producing its flagship iPhone 14 in India, where it has been assembling older models since 2017.

Apple did not respond to Al Jazeera’s request for comment.

China’s dominant position in Apple’s supply chain has gradually waned in recent years. Until 2019, China was the primary location of about 44-47 percent of Apple suppliers’ production sites. China’s share fell to 41 percent in 2020 and then 36 percent in 2021.

JPMorgan has estimated Apple could make 25 percent of all iPhones in India by 2025.

The trend has raised suggestions Apple’s investment in China may have peaked. Yet, despite shifting production, Apple’s deeply entrenched presence in the country, where at least 95 percent of all iPhone manufacturing still happens, is likely to make diversification a challenge.

“Apple’s 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 labour market optimised to meet the peaks and troughs of Apple’s seasonal production cycle.

China, for instance, facilitates Apple’s on-demand access to a vast pool of migrant workers, allowing assembly lines to swell to up to 1 million workers ahead of a new iPhone launch 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 clusters also benefit the company, he added. Many top suppliers are willing to work for less when partnering with Apple, so they can learn from its supply chain prowess and, in turn, win more contracts with Chinese brands aiming to mirror Apple’s success.

“Apple’s business model is about forcing suppliers to compete against each other to avoid becoming overly dependent on any single supplier,” the executive said.

Apple looks to be leaning further into that strategy to diffuse supply chain risks.

Besides diversifying to Vietnam and India, Apple also plans to contract a broader cohort of suppliers in China, too. The rationale is that picking more winners from the pool of competing firms will stop the emergence of single points of failure.

Compounding the headaches from Beijing’s COVID snafus are Washington’s new restrictions blocking United states firms from doing business with the most innovative companies in China’s tech ecosystem.

In October, Apple cancelled its contract with leading Chinese memory chipmaker Yangtze Memory Technologies after the firm was blacklisted as part of US President Joe Biden’s escalating campaign to hobble 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 transistors needed across all iPhone models.

This leaves Apple with little choice but to deepen its dependency on the US-led supply chain. Apple has since tapped South Korean rival Samsung for the NAND flash memory it had hoped Yangtze would provide, DigiTimes reported last month.

Meanwhile, the company is set to increase its reliance on the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest manufacturer of advanced chips. Apple confirmed this month it would use the Taiwanese chipmaker’s four-nanometre and three-nanometre chipmaking processes for its custom A-series and M-series chips.

Geopolitical tensions over self-ruled Taiwan, which Beijing claims as its own territory that must be “reunified” by force if necessary, add to the complicated mix of factors influencing Apple’s outlook for China. While Washington does not officially recognise Taipei, Biden has repeatedly indicated he would commit US forces to defend the island in the event of a Chinese invasion.

After enjoying years of stability between the US and China, Apple must now navigate the intensifying geopolitical competition between the world’s two largest economies that includes one of the most dangerous flashpoints.

“The possibility that China might invade Taiwan raises alarm bells in Cupertino as well as Washington,” Philip Elmer‑DeWitt, a veteran tech journalist who covered Apple for almost four decades and now runs the online publication Apple 3.0, told Al Jazeera.

“Notice that both Tim Cook and Joe Biden showed up in Arizona for the start of TSMC’s new US-based factories,” Elmer‑DeWitt added, referring to a recent event at which TSMC announced it would ratchet up its investment for the US-based semiconductor plants from $12bn to $40bn.

Meanwhile, uncertainty remains over exactly how, and how quickly, China will exit from “zero-Covid”. Though 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 raised the prospect of significant disruption and death.

“Investors need to understand the end of zero-COVID is going to be a process, not a one-shot 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 companies – to operate,” Qazi said. “This means Western companies and Western countries will feel an outsized impact from China’s social and political policies.”

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