China has been the backbone of Apple’s technological dominance for most of the last two decades. Starting with the iPod in 2001, Chinese contract manufacturers now make more than 90% of the US tech giant’s products. China’s own economic miracle has also negated a burgeoning middle-class market for iPhones and other Apple devices that now account for a fifth of its global revenue.
But trade and geopolitical tensions, coupled with China’s zero-COVID policy, have taken the shine off a collaboration that the New York Times described as a “best-of-both-worlds business model” in which products designed in the United States were manufactured at lower prices. cost in China.
Apple’s major manufacturing partners recently announced that they would move some iPhone production to India, taking advantage of an incentive program introduced by Indian Prime Minister Narendra Modi’s government. The move will quickly see around 5% of the company’s smartphones made in the South Asian country, up from 3% today.
The moves by Pegatron Corp and Foxconn, Apple’s main manufacturing partner, are seen as a sign of growing frustration over Beijing’s draconian COVID-19 lockdowns, despite low infection rates, and as the rest of the world has reopened its economies.
Zhengzhou shutdown hits iPhone production
The latest virus restrictions have hit Foxconn’s main plant in Zhengzhou in central China particularly hard. The facility, which employs about 200,000 people, has adopted so-called closed-loop operations, where staff live on site, isolated from the wider community. Foxconn, China’s largest private employer, has been forced to offer bonuses to attract workers who had fled the facility to avoid strict restrictions.
Apple has said Zhengzhou is “operating at significantly reduced capacity” and warned customers that the wait for its latest smartphone model, the iPhone 14, will be longer. The last quarter of the year is usually a peak season for companies like Foxconn as they ramp up production. before the rush of the end of the year holidays.
Market research firm TrendForce said last week that Zhengzhou’s capacity utilization rates hovered around 70%, while TF International Securities analyst Ming-Chi Kuo wrote on Twitter last week that more than 10% of global iPhone production capacity was affected by the current lockdown.
India will benefit, but how much?
In a new post this week, he predicted a 150% year-on-year growth in iPhones made by Foxconn in India next year, adding that the mid/long-term goal now is to “ship 40-45% of iPhones.” iPhone from India”. .”
Apple’s shift of production to India, and to a lesser extent Vietnam, may be easier said than done because of the huge logistics networks that support China facilities, Ivan Lam, a senior analyst at Counterpoint Research based in China, told DW. in HK.
“These supply chains are not only based on manufacturers but also component suppliers. It’s not easy to develop manufacturing in India if you don’t have component manufacturers nearby. Foxconn will still need to ship components to India so it may not be worth it in terms of scale.”
Lam said India will also take time to develop the same expertise in producing advanced models like the iPhone. Foxconn has a skilled workforce in China in the millions rather than tens of thousands in India and has invested heavily in upgrading its facilities in China, he added.
China’s COVID policy hurts its economy
Geopolitical storm clouds prompt a rethink
COVID isn’t the only threat to Apple’s longstanding love affair with Asia’s largest economy. The long-running trade war between the United States and China, coupled with Beijing’s threat to forcibly retake the island of Taiwan, which China considers part of its territory, are forcing the tech giant to rethink its manufacturing priorities.
Last month, the US Commerce Department effectively blocked a deal between Apple and Chinese memory chipmaker YMTC to supply components for the iPhone 14.
“Apple is discovering that geopolitics drives business models, not the other way around,” Matthew Turpin, a specialist on US China policy, told the New York Times. “This whole collection of supply chain risks is creating real liability for them.”
Apple’s sales growth in China has also been affected by a significant slowdown in the economy. Sales of the four new iPhone 14 models fell by nearly a third in their first 38 days on the market, Bloomberg News reported last week, comparing similar data to the iPhone 13.
Can Apple Trust China’s Growth Plans?
Like most multinationals, Apple is waiting for Chinese President Xi Jinping’s next move to prop up economic growth. Xi, who is slated for an unprecedented third term next year, has sought to rein in the country’s economic excesses through a common prosperity policy, which aims to redistribute more wealth to the poor.
It has cracked down on China’s own booming tech sector and caused a real estate crash that sent apartment prices down 20-30%.
Despite the current headwinds, Bank of America Apple analyst Wamsi Mohan does not expect a “quick decoupling” from China.
“As Apple remains a major employer indirectly in China and has close ties at the city, province and central government levels, we expect Apple to continue to navigate the cross-currents between the US and China as they have done very well. in recent years,” he said. he told DW.