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Apple looks beyond China for production as flirting turns sour

Taipei, Taiwan – Scenes of chaos erupted at Apple supplier Foxconn’s mega-factory in Zhengzhou, China, last month as workers, angered by the 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 peak sales season, putting its 14-quarter growth streak at risk. For Apple, which makes about 90 percent of its products in China, there is no easy remedy.

“This cannot be fixed in the short term, you cannot 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 almost exclusively concentrated in China,” Qazi added.

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

Apple is accelerating plans to make more of its new products elsewhere, notably 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 user data within the reach of local authorities, entertained Vietnamese Prime Minister Pham Minh Chinh at the Apple Park campus in Cupertino, California.

In September, Apple announced that it had started 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.

Foxconn protests
Workers at Apple supplier Foxconn’s mega-factory in Zhengzhou clashed with security personnel during protests over COVID-19 protocols and wages. [File: Reuters]

China’s dominant position in Apple’s supply chain has gradually declined in recent years. Until 2019, China was the primary location for around 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.

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

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The trend has raised suggestions that Apple’s investment in China may have peaked. Despite the shifts in production, however, Apple’s deeply entrenched presence in the country, where at least 95 percent of all iPhone manufacturing still takes place, is likely to make diversification a challenge. challenge.

“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 job market optimized to meet the peaks and valleys of Apple’s seasonal production cycle.

China, for example, facilitates Apple’s on-demand access to large numbers of migrant workers, allowing assembly lines to grow to 1 million workers before a new iPhone launch and down to a fraction of that during the 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 in an effort to replicate Apple’s success. .

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“Apple’s business model is to force vendors to compete with each other to avoid becoming too dependent on one vendor,” the executive said.

chinese apple
[File: Mike Segar/Reuters]

Apple seems to lean more towards that strategy to dissipate supply chain risks.

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In addition to branching out to Vietnam and India, Apple also plans to source a broader cohort of suppliers in China. The reason is that choosing more winners from the group of competing companies will stop single points of failure from appearing.

Washington’s new restrictions preventing American companies from doing business with the most innovative companies in China’s tech ecosystem compound Beijing’s COVID problem headaches.

In October, Apple canceled its contract with China’s leading memory chip maker, Yangtze Memory Technologies, after the company was blacklisted as part of US President Joe Biden’s escalating campaign to hampering China’s tech sector amid alleged national security concerns. Apple had initially planned that the Chinese company would eventually supply up to 40 percent of the transistors needed in all iPhone models.

This leaves Apple with no choice but to deepen its reliance on the US-led supply chain. Apple has since turned to South Korean rival Samsung for the NAND flash memory it hoped Yangtze would provide, DigiTimes reported last month.

Meanwhile, the company is poised to deepen 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 4-nanometer and 3-nanometer chip-making processes for its A-series and M-series custom chips.

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Geopolitical tensions over the self-rule of 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 prospects for China. While Washington does not officially recognize Taipei, Biden has repeatedly indicated that 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 its most dangerous flashpoints.

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“The possibility that China could invade Taiwan is ringing alarm bells in both Cupertino and Washington,” Philip Elmer-DeWitt, a veteran tech journalist who covered Apple for nearly 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 new TSMC US factories,” Elmer-DeWitt added, referring to a recent event where TSMC announced it would increase its investment for plants. of semiconductors from $12 billion to $40 billion.

Meanwhile, uncertainty remains 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 among the population has raised 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 the restrictions that have been lifted could be reinstated until enough of the population has been inoculated with vaccines. of mRNA.

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“China has become an increasingly difficult place for foreign companies, especially American ones, to operate,” Qazi said. “This means that Western companies and Western countries will feel a huge impact from China’s social and political policies.”

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