As affair sours, Apple looks beyond ‘iPhone factory’ to China | Technology

Taipei, Taiwan – Chaos erupted last month at Apple supplier Foxconn’s massive factory in Zhengzhou, China, where workers, angry over COVID-19 quarantines and unpaid wages, scuffled with security guards.

Unprecedented protests in “iPhone City” have caused major delays to the launch of the newest iPhones at the end of the year — Apple’s busiest sales season — putting at risk 14 straight quarters of growth. For Apple, which manufactures about 90 percent of its products in China, there is no easy remedy.

“This cannot be resolved in the short term, you cannot easily build iPhone cities 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 very fragile because they are almost entirely concentrated in China,” Kazi added.

The crisis has highlighted rising costs of operating under China’s “zero coronavirus” strategy – which Beijing is scrambling to loosen after nearly three years of lockdowns and border controls – and fueled the tech giant’s resurgence. The urgency to adjust its supply chain lines.

The Wall Street Journal reported earlier this month that Apple is accelerating plans to manufacture more of its new products elsewhere, particularly in Vietnam and India.

In May, Chief Executive Tim Cook warmed to Beijing, agreeing to remove politically sensitive apps and store Chinese users’ data within the purview of local authorities, and at Apple’s Cupertino, California, facility. The Park Park hosted Vietnamese Prime Minister Pham Minh Trung.

In September, Apple announced that it had started producing the 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 Protest
Workers at Apple supplier Foxconn’s massive Zhengzhou factory clash with security officers as they protest COVID-19 protocols and wages [File: Reuters]

In recent years, China’s dominance in Apple’s supply chain has gradually weakened. As of 2019, China was the primary location for approximately 44-47% of Apple’s suppliers’ production bases. China’s share drops to 41% in 2020 and then to 36% in 2021.

JPMorgan estimates that Apple could produce 25% of its iPhones in India by 2025.

The trend suggests that Apple’s investment in China may have peaked. However, despite the shift in production, Apple’s entrenched presence in China — where at least 95 percent of iPhone manufacturing still takes place — could make diversification a challenge.

“Apple is not leaving China,” a former Apple executive working in China told Al Jazeera on condition of anonymity.

The former executive said China has been a major source of profitability for the company and that the country’s labor market is optimized to accommodate the peaks and troughs of Apple’s seasonal production cycle.

China, for example, facilitates Apple’s on-demand access to a fixed pool of migrant workers, allowing assembly lines to grow to 1 million workers ahead of a new iPhone launch and scale back to a fraction during the off-season.

“This doesn’t exist in India, and Vietnam probably doesn’t have the population that Apple needs to scale,” the former executive said.

China’s industrial clusters also benefit the company, he added. Many top suppliers are willing to work at lower prices when working with Apple, so they can learn from its supply chain strengths and in turn win more contracts from Chinese brands to emulate Apple’s success.

“Apple’s business model is to force suppliers to compete with each other to avoid over-reliance on any one supplier,” the executive said.

Apple China
[File: Mike Segar/Reuters]

Apple looks set to lean further into this strategy to diversify supply chain risk.

In addition to expanding into Vietnam and India, Apple also plans to sign contracts with a wider range of suppliers in China. The rationale is that picking more winners from competing companies will prevent single points of failure.

New restrictions in Washington that prevent U.S. companies from doing business with the most innovative companies in China’s tech ecosystem are adding to troubles from Beijing’s COVID chaos.

In October, Apple canceled its contract with China’s leading memory chipmaker Yangtze Memory Technologies after it was blacklisted in an escalating campaign by U.S. President Joe Biden over alleged national security concerns aimed at hindering the Part of the event in China’s tech industry. Apple initially planned for the Chinese company to eventually supply 40 percent of the transistors needed for 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 NAND flash memory provided by YMTC, DigiTimes reported last month.

At the same time, the company will increase its reliance on Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest maker of advanced chips. Apple confirmed this month that it will use the Taiwanese chipmaker’s four- and three-nanometer chipmaking processes in its custom A-series and M-series chips.

Geopolitical tensions over self-governing Taiwan add to the complicating factors affecting Apple’s prospects for China. Beijing claims Taiwan as its own territory, which must be “unified” by force if necessary. While Washington does not officially recognize Taipei, Biden has repeatedly said he would send U.S. troops to defend Taiwan if China invaded.

After enjoying years of stability between the U.S. and China, Apple must now grapple with growing geopolitical rivalry between the world’s two largest economies, including one of the most dangerous flashpoints.

“The possibility that China might invade Taiwan has set off alarm bells in Cupertino and in Washington,” Philip Elmer-DeWitt, a veteran tech journalist who has covered Apple for nearly 40 years and now runs Apple, told Al Jazeera. Online Publications Apple 3.0.

“Note that Tim Cook and Joe Biden were both present in Arizona to start ground for TSMC’s new U.S. fab,” Elmer‑DeWitt added, referring to the latest event where TSMC announced it would increase its presence in U.S. factories. Investment in semiconductor factories increased from $12 billion to $40 billion.

At the same time, uncertainty remains over how and how quickly China will exit “Zero COVID-19”. While Beijing has lifted some of its toughest restrictions in recent weeks, restrictions such as quarantines on international travel remain in place, while the rapid spread of the virus through the population increases the potential for havoc and death.

“Investors need to understand that the end of zero COVID will be a process, not a one-off event,” Qazi said, adding that restrictions that had been lifted could be reimposed until enough of the population is vaccinated with the mRNA vaccine.

“For foreign companies — especially U.S. companies — China has become an increasingly complex place to do business,” Kazi said. “This means that Western companies and Western countries will feel the huge influence of Chinese social and political policies.”

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